Improve ROOK Token Model

KIPs Draft
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Proposal

Improve the utility of the token ROOK

Reference

  1. KIP-35: Streamlined tokenomics

  2. @DaddyMatty comments on Buy-Back

  3. Buy back plan of 40 Weeks - OpenLeverage

  4. Binance buy-back

  5. Real Yield Cash-Flow

Background

Iconium Blockchain Ventures is an early contributor to the Rook Project. We have kept and increased our stake since November 2020.

Following the approval of KIP-35 (reference n1), the function of ROOK has been reduced to that of a governance token, rendering it unattractive to both new and existing investors. The objective of this proposal is to initiate a discourse on enhancing the present token model, which would provide incentives for all parties invested in the project.

The KIP-35 proposition raises several noteworthy starting points, such as:

  • The burning mechanism implemented earlier failed to exert a substantial influence on the tokenā€™s supply.
  • The distribution of a portion of revenue to token holders did not generate a sustainable Annual Percentage Yield (APY) that could incentivize ROOK holders to stake.
  • The simplification of bid distribution to allocate 90% to the user and 10% to the DAO Treasury is incentivizing all parties except for the token holder.

The substitution of ROOK with WETH in the bidding mechanism has two significant effects:

  1. PRO: It would lower the barriers to entry for new and existing keepers, thereby enhancing the adoption of the protocol.
  2. CONS: It would considerably diminish the utility of $ROOK as a governance token, as burning and staking would be phased out.

Following the identification of the broken token-model in the proposal, it is imperative to implement necessary measures to incentivize all stakeholders of ROOK.

Currently, the DAO Treasury is a robust piece of ROOK. However, many users have observed a significant disparity between the present valuation of the treasury and the fully diluted valuation of the ROOK token. The primary purpose of the DAO Treasury presently is to finance and support ROOK Labs and the core team and to generate additional yields that remain within the DAO Treasury.

While securing financing for the development of ROOK is essential to ensure its long-term success and active treasury management is necessary to decrease the burn rate, a mechanism should be implemented to support and maintain the tokenā€™s valuation, which is unrelated to the Treasuryā€™s valuation.

Following the KIP-35 proposal, the Treasury can grow through two methods:

  • The 10% revenue distribution from Keepers
  • The yields generated from Treasury Management.

Our proposal involves utilizing a portion of these yields to create a consistent buy pressure for the ROOK Token. The following proposal will explore two primary methods:

  • Token buy-back
  • New staking model that distributes revenues in various tokens.

Let us delve into both proposed models:

  • Buy-back of the token: The possibility of a ROOK buy-back has been discussed, with two main concerns raised by @DaddyMatty (reference n2):
    • Transparency of our funds and orders on-chain. This concern can be addressed by employing a professional market maker and conducting the buy-back using a centralized exchange (CEX). Monthly reports can be provided to the community on the results of each operation. Alternatively, the buy-back can be executed over a longer time frame, as done by OpenLeverage (reference n3).
    • Regulatory pressures from the SEC, which may classify ROOK as a security due to the expectation of profits. While not providing professional feedback as a non-lawyer, it is worth noting that several projects, including Binance with its automatic buy-back and burn of BNB, have implemented and used this approach.
  • New staking model that redistributes revenues in different tokens: The real yield narrative is currently a hot topic, and GMX has demonstrated its success by redistributing ETH revenue to stakers. Adopting a similar solution that redistributes the 10% revenue generated by Keepers would be an organic KPI, connecting the two main actors of the ROOK ecosystem: the keepers and the token holders.

Specification

The objective of this proposal is to initiate an inclusive dialogue with the community to identify novel approaches to enhance the functionality of ROOK. Two potential solutions have been presented for consideration, and I welcome any feedback or suggestions in relation to them.

Disclosure: Iconium has a position in Rook. This draft proposal was written by Iconium, and the views expressed herein reflect its own opinions. Iconium is not receiving compensation from anyone for this proposal.

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UPDATE: Edited hyperlinks per author request

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Hi there and thanks for the proposals. I guess there are two fronts to consider here:

Buybacks: I personally am not opposed to buybacks, but more information would be needed. What exactly do you propose? I will say that I do not personally like consistent buybacks for the reasons previously discussed

Staking Program: I will leave this to @Guard and the legal side of things to comment on before providing more input. Considering we just ended a staking program, my bet is this aspect is not super appealing.

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Hi all, governance participant here.

Thanks for the clear and concise post Inconium.

Rook team is really close to the end of their 2nd long dev cycle. They delivered the original coordination game so I trust them to deliver on this redesign/expansion tbh. Rook has had a problem communicating product priorities and timelines for a while. This could be a legal or competitive advantage problem, idk but its still a problem.

To address your main pointsā€¦

Buy Backs:

I donā€™t see how this isnā€™t just treasury drain? Shouldnā€™t this treasury be 100% focused on adoption and not ROOK price at 17M fdv? Especially with whales trying to dump $200K ROOK on us live this last month. This money would go DIRECTLY into this dudes pocket.

Goal is to grow.

Iā€™d rather have 100% of the buyback budget put into marketing unfortunately there is no clear product to market.

Two things I see as marketable:

  • MEV protected RPC.
  • Complete MEV protected Trading Terminal

These are products that can win sizable market share (In the same way that LDO has like 75% market share on Validator RPCs currently). We donā€™t have timelines or a clear visions of these so who knows when we could market them.

Im thinking what percentage of user order flow can Rook capture? We have dex traders metrics by # of users and volumes. What percentage can rook capture?

To answer these questions we need better product tho. Product takes money to build.

Staking:

Iā€™m no legal expert but I believe the models displayed by Uniswap and LDO prove that tokens can have value without putting the team in range to get sniped by gensler during his ā€œmy dick is hugeā€ ftx revenge arc.

conclusion

Maybe the team could present a timeline where they could deliver these goal and if they fail by then buy backs could be implemented after?

idk jus some rant thoughts. thanks

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I am confused at your distaste for buybacks here personally - we are trading WAY below treasury backing for starters this produces no confidence for new entrants and also the biggest losers here are the ones holding the tokens. The more tokens the treasury buys back under backing value is a huge WIN for the protocol because we get them at such a discount - token holders get more value per token - the team actually shows that they have a motive to protect the tokens price and its valuation. The treasury benefits greatly instead of rouge traders getting an opp to buy tokens at over a 100% discount to treasury value

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Staking program is very appealing if returns are good enough. Our staking program failed because of lack of volume.

I think a staking program where 5% (percentage can vary) of the treasury is distributed monthly is something that should be considered. If treasury grows, APY for token holders grows as well.

The proposal would be that all revenue generated by the protocol goes to the treasury, and the 2 objectives of the protocol are well covered, 1) incentivize token holders getting a monthly portion of the treasury 2) focus in growing the treasury.

If the project succeeds, this proposal would be sustainable. If revenue does not kick off, treasury would be drained to 1/3 after about 2 years distributing 5%, and 4 years distributing 2%.

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the example given in the proposal was to do a similar buyback and burn like BNB. Doing that wouldnā€™t be the DAO reacquiring the tokens at a discount, as they would simply be eliminated from the supply and the DAO receives no upside.

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We can agree that at least some amount of the treasury is in excess of spending needs for the next year, and currently idle/unproductive. This capital could be put to better use through buybacks.

ROOK currently trades at $18M FDV whereas its treasury value is ~$40M (excl ROOK token), reflecting 130%+ return if achieved over a year.

My counters to points raised against a buyback:

  1. Buybacks benefit whales who dump ROOK on us.
    If we agree that the inherent value of ROOK is at least its book value, then sellers of ROOK at $18M FDV would immediately lose out on an immediate 2-3x vs. those that continue holding ROOK. Buybacks benefit ROOK holders at the expense of ROOK sellers.

  2. The budget is better put into marketing / other initiatives.
    Certainly, some amount of investment into other initiatives is warranted. But not all. Every investment has diminishing returns. I do not believe the author is advocating for an all-out buyback program that drains the treasury, but a modest one that can put some idle capital to better use. So consider the buyback one of the many routes ROOK can take to creating value for token holders.

  3. Whatā€™s the point?
    By showing that ROOK cares about its token holders, the valuation of ROOK should rise from a discount of treasury value to a premium. A higher valuation allows ROOK to monetize its native governance token in the future. The ~$2M of ROOK tokens in its treasury could 2-3x in the near-term.

I agree with @DaddyMatty that consistent buybacks are probably premature to implement at this stage. But given ROOKā€™s current valuation, I believe it is value accretive to implement an opportunistic buyback program. And even the announcement of a modest buyback program should already nudge ROOK closer to treasury value, without ROOK actually spending a dime (see the market price after this proposal was posted).

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I agree with Deetz here.

Also, Binance diverts revenue into the BNB. Very different than a treasury with low/no cash inflow.

Buyback and keep would be slightly preferable to buyback and burn.

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If we do buybacks here, we are transferring Rook treasury directly into whale wallets. (check the onchain proof in #crypto-markets) Lets call it what it is. Buybacks here are an OTC deal to buy out bear whales.

Smaller retail traders might be disuaded by price but real investors will be dissuaded by a product with no adoption, which is much more important.

Im confused why marketcap/treasury ratio matters in terms of Rook Protocol being successful. Think about it this way, if Rook did a VC raise for 40M the FDV would be 400M and we would get unlock inflated to death anyway. Innovation, product, and adoption are all that matters now, buybacks cant save price.

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  1. Youre assuming buybacks will close the disparity while assuming price will go ā€˜upā€™ to meet in the middle? In reality, price could stay the same and the treasury could come down to meet it. We dont know the results of a buyback like this and its huberoius to say we do.

  2. I think its fair that not all should be allocated to marketing. Maybe a five year runway is more than necessary but having excess money is not a bad thing in a bear market.

  3. Should is a big assumption there. I donā€™t think I agree. Hereā€™s where I do - should Rook only own 11% of its token?

I fail to see how buybacks benefit Rook in the long term. How does it convert anything more than ā€˜price go upā€™ for a few days or months. The downside is that Rook has less capital to build/market with.

A compromise maybe?

Rook DAO seeks to acquire 25% ROOK token supply. This is close to the allocation held by other popular DAOs (LDO, UNI, OP) This is a ā€œbuybackā€ of 2.0M ish. The DAO should execute this at the best possible price whether that be open markets or OTC over a few months.

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Weā€™ll be talking about this proposal at Governance Workshop today, Wednesday March 8th at 2PM ET. Iconium have agreed to join us to discuss their thinking and the proposal in general, so please bring your questions and comments to the DAO Calls channel this afternoon.

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Rook team is really close to the end of their 2nd long dev cycle. They delivered the original coordination game so I trust them to deliver on this redesign/expansion tbh. Rook has had a problem communicating product priorities and timelines for a while. This could be a legal or competitive advantage problem, idk but its still a problem. @rhizobtc

We do not want to question either the quality of the developersā€™ work or the technical releases that the team deems necessary in the coming months. At this stage, we only want to encourage discussion about a possible revision of the token model, which currently seems to be limited to the role of a governance token.

I donā€™t see how this isnā€™t just treasury drain? Shouldnā€™t this treasury be 100% focused on adoption and not ROOK price at 17M fdv? @rhizobtc

Our proposal does not aim to redistribute the treasury: it is essential to ensure that there are sufficient resources to continue supporting the development and growth of the protocol, and the treasury must be ample enough to ensure this growth.

By showing that ROOK cares about its token holders, the valuation of ROOK should rise from a discount of treasury value to a premium. @skatensurf

we are trading WAY below treasury backing for starters this produces no confidence for new entrants and also the biggest losers here are the ones holding the tokens @Cmande3

We share the concerns of other users about the current evaluation of Rook, which has been trading at a significant discount for many months compared to the treasury value alone. Whether this is due to broken tokenomics, weak product/market fit, or a combination of the two, is difficult to say, but we believe it is a strong signal that a change is needed.

Two things I see as marketable:

  • MEV protected RPC.
  • Complete MEV protected Trading Terminal
    @rhizobtc

Any changes to the product/market fit are not part of the scope of our proposal; at this stage, we only want to discuss the tokenomics model.

I do not believe the author is advocating for an all-out buyback program that drains the treasury, but a modest one that can put some idle capital to better use. So consider the buyback one of the many routes ROOK can take to creating value for token holders. @skatensurf

It is true that the Book-to-Value can be interpreted as a valid opportunity for deploying excess capital, given the current 50% discount applied. However, our proposal does not aim to focus on a one-off deployment of a portion of the treasury for a similar initiative. Instead, it aims to build a more sustainable tokenomics model that ensures that the value produced by the protocol is ā€œcapturedā€ by the token holders (in the case of burn) or by the stakers (in the case of staking reward).
We are aware that sentiment regarding buybacks is mixed. There are several examples on the market of how it can be technically implemented. Probably, a similar example to what we want to propose is the process undertaken by the 1INCH DAO last summer. The revenues generated from swaps were used for token buybacks, which the DAO considered undervalued by the market. In the case of $ROOK, this is even more evident due to the Book-To-Value ratio. A similar process allows for capturing the market discount and benefiting from it through Protocol Owned Liquidity, which can scale in correlation with the tokenā€™s performance.

Staking program is very appealing if returns are good enough. Our staking program failed because of lack of volume.
I think a staking program where 5% (percentage can vary) of the treasury is distributed monthly is something that should be considered. If treasury grows, APY for token holders grows as well. @PonsTJ

Our proposal aims to modify the tokenomics model in order to ensure a stable and organic transfer of value to the token holders. To achieve this, we focus on utilizing revenue flows to perform a buyback. However, at this stage, we acknowledge that the protocolā€™s revenue is limited, and cannot provide an attractive APY for the stakers. Therefore, it may be useful to temporarily allocate a portion of the treasury (<5%) to a temporary incentive program that supports the APY through an additional buyback with redistribution to stakers (with a variable APY based on timelocks). While we believe that incentivization is not a long-term solution and should be treated as a marketing expense to attract users, an incentivized staking mechanism could result in lower token volatility and be a first step in redistributing a portion of the protocolā€™s value to the stakers.

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When has marketing ever worked out as a good investment to create value even in demand for a major project. That is bull market talk, there is no one to market to. 50k active users of on chain products, the ones using RPCs already know of Rook.

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Given that treasury usage is bound to the treasury charter, can OP explain how using the treasury like this will help further the projectā€™s mission? (See KIP-28 for an outline of acceptable uses of the treasury)

Also, I read that IBV is an early contributor to the project. Can you outline what those contributions are/were?

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Given that treasury usage is bound to the treasury charter, can OP explain how using the treasury like this will help further the projectā€™s mission? (See KIP-28 for an outline of acceptable uses of the treasury) @tommy

Regarding the Rook DAO Treasury Charter, our proposal could fall under the use of the Treasury in section 4: Making targeted and risk-controlled strategic investments.
For example, buyback is a mechanism already common in tradfi and can be strategically used when the market heavily discounts the value and the project is interested in safeguarding the volatility and robustness of the token itself.

Also, I read that IBV is an early contributor to the project. Can you outline what those contributions are/were? @tommy

We have been in contact with TT and Amber for a long time and were one of the largest LPs, providing several million USD worth of renBTC, WETH, and DAI during the initial liquidity bootstrap in 2020.

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Ah so you were one of the OG liquidity providers, gotcha.

Regarding the buybacks, are there any examples of early stage startups performing buybacks in tradfi? (Really in our case itā€™s almost pre-product, or at least pre PMF). I canā€™t really think of any, but maybe Iā€™m missing some?

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Agree that buyback and keep is preferable to buyback and burn.

Why marketcap / treasury matters ā†’ ROOK currently only has two paths for raising capital: 1) generate protocol revenue and 2) selling ROOK in its treasury to external capital. Because protocol revenue is trivial right now, the latter action is the only viable option if ROOK would like to bolster its treasury.

This issue is not urgent as ROOKā€™s treasury currently looks healthy. But if this problem persists when ROOK needs capital, it may be forced to sell an undervalued currency.

Buybacks do not benefit whales ā†’ I believe most here believe ROOK to be undervalued. At the minimum, ROOK should be worth its book value. But it should probably trade some multiple above its book value to express the positive optionality of what ROOK is building. So contrary to the argument above, ROOK would benefit at the expense of whales selling at the current price (i.e. ROOK is buying $1 for 50 cents)

Buybacks make sense from a treasury management perspective. Instead of earning mid single digit yields on stablecoins, ROOK can earn orders of magnitude more by repurchasing its token.

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I canā€™t really think of any publicly traded, early stage startup that trades below its book value (unless we look at microcaps in emerging markets). Or a pre-PMF startup raising capital at a valuation below its book value.

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whats an example of something trading below book?