BIP-68: Introducing a Two Bucket Approach for Botto DAO’s PoL

sync

0. Summary

“To some extent, liquidity can be considered a public good.”- Jonathan Kearns and Philip Lowe, Promoting Liquidity: Why and How?, Reserve Bank of Australia, Research Discussion Paper 2008-06, October 2008

This BIP seeks to introduce a gradual commitment of liquidity as a public good by Botto DAO. This would be achieved via the implementation of a two bucket approach for the management of its treasury’s Protocol Owned Liquidity (POL) that delineates between DAO Directed POL and Permanent POL.

1. Rationale

“In rare instances, a currency can be successful without a centralized hoard that backs it (e.g. Bitcoin), but this is the exception rather than the rule. Even in such cases, something more metaphysical must undergird the circulating currency’s value, such as ‘trust in the community.’ If there is no immobilized and stable value that the circulating currency represents, the latter will have no value itself.”- Gustav Peebles, “Common(s) Currency: Collectivized Hoards and the Regulation of Money,” As If Already Free, 2023, pg. 188

To underscore Botto DAO’s commitment to ensuring POL is upheld for the long-term benefit of its stakeholders, and in alignment with the idea that liquidity may be considered a public good too, this BIP suggests the implementation of a two bucket model for POL, whereby:

Over time, half of current total POL remains within the agency of Botto DAO to redirect/repurpose in the future (DAO Directed POL), and half of current total POL is locked permanently to entrench its availability as a public good for trading on Ethereum mainnet (Permanent POL).

Furthermore, this BIP seeks to advance Botto DAO’s progressive decentralization by extending Botto’s No Human Interference Rule to the DAO’s liquidity management strategy, as locked liquidity associated with Permanent POL would ensure a continuity of liquidity is upheld on Ethereum mainnet that is not susceptible to adjustment in the future. This aligns with fostering governance minimization for Botto DAO through the reduction of its governance surface as related to POL oversight, and by extension would reinforce trust in the community and thus BOTTO's value as the currency underlying Botto Project.

2. Proposal specifications

3. Criteria of success

Amplification of Botto Project’s visibility from the monthly announcements on Botto’s communications/social media channels of LP tokens being locked for the Permanent POL bucket, further reinforcing Botto DAO’s commitment to progressive decentralization and governance minimization.
Increased market confidence and crypto native user acquisition driven by Botto DAO’s consideration of liquidity as a public good vis-a-vis the Permanent POL bucket.
Increased interest from collectors, as entrenched liquidity on Ethereum mainnet vis-a-vis the Permanent POL bucket may further reinforce the provenance of Botto’s minted artwork as originating from the first decentralized autonomous artist built on Ethereum with a liquidity management strategy that is anchored accordingly.
Additional source of ongoing revenue for Botto DAO vis-a-vis the distribution of trading fees in ETH collected from Permanent POL at the end of every period, and the corresponding revitalization of Botto Project's foundational and symbolic burn narrative as linked to accrued trading fees in BOTTO tokens being sent to the zero address.
Uphold the continuity of the 100 VP per round baseline for all accounts per BIP-54, as linked to the total number of LP tokens allocated to Permanent POL over time, thus ensuring the constancy of baseline VP for the ongoing training of Botto by both new and established users.

4. Disadvantages

The proposed burning of trading fees collected in BOTTO tokens as linked to Permanent POL may be viewed as wasteful, though it implicitly returns the associated value to all Botto stakeholders vis-a-vis the reduction of the circulating BOTTO token supply.

Note that unlike the prior burn initiative which ended with the approval of BIP-47, the proposed burning of BOTTO tokens in this proposal would not reduce the treasury's BOTTO holdings, and instead would be directly linked to reducing BOTTO tokens already in circulation. As such, the treasury's BOTTO holdings would not be impacted.
The proposed initiation of Permanent POL will limit Botto DAO’s operational optionality, though the treasury’s holdings are currently sufficient to cover expenditures “for years to come,” not counting any additional revenue the treasury will continue to accrue.

As of August 2024, Botto DAO’s treasury holdings, from which the core team’s operational expenditures are covered per BIP-43, consist of:

407.54 ETH
1,339,280.62 USDC
15,619,603.32 BOTTO

The treasury’s current total POL consisting of 17,215.11 LP tokens is separate from the above holdings, and the portion corresponding to DAO Directed POL as defined under the terms of this proposal would not go below 50% of this present sum.

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In light of feedback, this proposal will be modified to incorporate a time lock for the suggested Permanent POL bucket, instead of an indefinite lock forever. In its proposed initial iteration, this time lock will still be achievable via the UNCX locker for Uniswap V3, and as such the locked liquidity would still be highlighted on token trackers such as DEX Tools vis-a-vis the pool information section.

The proposed lock would be for a three year term, which would be automatically renewed by the DAO, though the manner in which it is allocated may vary over time depending on innovations in DEXes, liquidity locker apps such as UNCX, etc.

The proposed Permanent POL bucket itself would thus still be "permanent" in the sense that it would not be able to be apportioned for any other use aside from on-chain liquidity provision on Ethereum mainnet in the future, though the manner in which it is made accessible may change. Similarly, the proposed burn of trading fees accrued in BOTTO and the split of trading fees accrued in ETH between active voters and the treasury would be applicable to the initial three year lock; this breakdown may change in subsequent renewals of the lock depending on how future locks are implemented.

Considering this compromise, it is suggested that 30% of total POL as of the August 2024 DAO financial report be allocated to the Permanent POL bucket upon approval of this proposal (5,164.533 LP tokens), with a subsequent commitment of an additional 20% after one year (3,443.022 LP tokens).

This approach would reduce the operational burden of managing monthly contributions to Permanent POL as originally proposed, while allowing for a more robust baseline of liquidity to be available to stand up the Uniswap V3 pool and thus make it appealing for liquidity providers to consider building on over the next year as the LM program comes to an end in October 2025.

Note that as defined in this proposal, the Permanent POL bucket would not exceed 50% of total POL as of the August 2024 DAO financial report (8,607.555 LP tokens out of 17,215.11 LP tokens). However, after the initial three year lock, the DAO may choose to increase Permanent POL beyond this level, though it would not be able to reduce it. This is because the DAO Directed POL bucket would exceed 50% of total POL by the end of the three year term, as it will continue to grow with ongoing POL contributions from revenue per BIP-59, in addition to any future lump sump increases in POL resulting from OTC deals in accordance with BIP-42.

For the DAO Directed POL bucket, an additional clarification is warranted for inclusion in this proposal. The POL corresponding to this bucket may be repurposed by the DAO for some other use aside from liquidity provision in the future, but a separate governance proposal would be required for this to be executed, and it was suggested that a super-majority be required for such a decision to move forward.

As such, for any proposed repurposing of DAO Directed POL, it is advised that at least 65% of votes in favor be required, with a minimum of at least 5M BOTTO total participating in the vote. A minimum of 5M BOTTO is suggested for participation because any repurposing of the DAO Directed POL bucket would necessarily reduce the availability of on-chain liquidity for Botto's stakeholders collectively. This minimum is not unreasonable, and as an example, over 7M BOTTO participated in the vote for BIP-42, with over 70% of votes in favor of the consequent change in the LM program. The Permanent POL bucket would nevertheless act as a counterbalance to such a change to the DAO Directed POL bucket if it were to ever be pursued.

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Per recent discussions related to potentially migrating liquidity to Solana to broaden BOTTO's accessibility, I've updated the proposed compromise as previously noted above. Sharing here for reference:

No liquidity would move from Uniswap V2 to Uniswap V3 for the Permanent POL bucket. The portion of the Permanent POL bucket on Ethereum mainnet would remain in the current Uniswap V2 pool, to ensure liquidity fragmentation is minimized. Thus, all aspects of this proposal related to Uniswap V3 can be discarded.
A total of 50% of the treasury's POL as of the August 2024 DAO financials report would be allocated to the Permanent POL bucket upon approval of this proposal. This amounts to 8,607.555 LP tokens out of 17,215.11 LP tokens.

Of this 50%, 75% would be time locked for three years in the Uniswap V2 pool on Ethereum mainnet (6,455.66625 LP tokens) and 25% would be migrated to seed time locked liquidity on Solana (2,151.88875 LP tokens) for three years upon approval. Both time locks could be facilitated by their respective UNCX lockers.
There'd be no need to space out the time lock (30% initially and 20% after one year = 50%) as originally proposed to mitigate against an immediate and notable reduction of liquidity in the Uniswap V2 pool on Ethereum mainnet where most BOTTO holders reside, as it is no longer a concern as a large part of Permaent POL will remain there.
To ensure liquidity in the Uniswap V2 pool is upheld after LM incentives end in October 2025, the VPs per LP token staked in the LM contract could be increased by some agreed upon date ahead of then. perhaps 300 VP per LP token staked per round, instead of the current 200 VP per LP token staked per round.
The terms for the DAO Directed POL bucket would remain as noted in the initial compromise posted above.