In this post, I propose an update to the Nouns DAO software. Any ETH held by the treasury in excess of
total_nouns_count * trailing_N_day_median_auction_price can be burned. The goal of this change is to create a code-level incentive for the DAO to (1) spend the treasury, (2) grow the Nouns supply, and (3) increase the auction price. This change will also mitigate the “risk free value” arbitrage (detailed below).
When this change is first introduced, there should be a waiting period before the first burn can occur, in order to give the DAO time to coordinate. I think an exciting first burn date could be New Year’s Eve, 2023 (h/t Elad).
As an example with some real numbers, at the time of writing, the trailing 7 day median auction price is 29.43 ETH. There are 384 Nouns in circulation.
384 * 29.43 = 11,301 ETH. The DAO currently holds 13,917 ETH. Meaning, if we used this formula and the burn mechanism were in place today, anyone could call to burn
13,917 - 11,301 = 2,616 ETH / ~$2.5M.
If we can ship this mechanism and have it set to go live on New Year’s Eve, I think the next few months could be one of the generative and attention grabbing periods for Nouns DAO to date: a time where DAO is maximally incentivized to work together and pass big spending proposals. And I also wonder, what’s a vote on how to spend $2.5M worth?
Show me the incentive, I’ll show you the outcome. - Charlie Munger
To the extent a protocol guides or limits its users, it should be to the end of helping users transaction/come to agreements they might not have otherwise. Creating maximally productive Schelling points. - Actor Protocols*
I believe the formula described above elegantly ties together three things—the treasury, the Nouns supply, and the auction price. The burn encodes, at the software level, a clear mandate for DAO voters: spend the treasury, grow the Nouns supply, and increase the auction price. To avoid burning ETH, the DAO must accomplish at least one of these things.
This change is highly opinionated about what Nouns is and the purpose of the DAO. I think that is good. Nouns DAO software is already full of opinions: democratic vote, waiting periods, quorum thresholds, and now forking. The software represent our collectively shared beliefs about how it is best for the DAO to operate.
Like a country passing constitutional amendments, overtime we update our operating software as we update our beliefs or want to make explicit things that were priorly implicit.
It is my view that the treasury exits to be spent. It does not exist to be hoarded. It does not exist as a sort of price insurance or put option for Nouns buyers.** The fact that, today, the DAO could go for an indefinite period of time without having to pass any proposals seems like a bug. The DAO members should be punished for failing to spend the treasury. The punishment is a burn. Fear of the burn will force DAO members to find middle ground and get proposals passed.
“One Noun, every day, forever” is supposed to be the meme of Nouns, but in my opinion there are currently insufficient incentives in place to protect this. After the fork, Nouns can now be more directly imagined as a pro rata claim on the treasury. Minting more Nouns dilutes ones claim and it is not surprising that there have already been proposals to stop the daily auctions.
With the burn mechanism in place, each additional Noun in circulation*** pushes the burn threshold higher. The DAO is “allowed” to hold more ETH as it grows the Nouns count.
Note, in the formula, having daily auction also serves the purpose of giving a price feed: we could have it such that if there have been no auctions for the trailing N days, then the implied auction price is 0 and all the ETH would be burned.
I find it elegant that the other way to avoid burning ETH is just to have an auction price that is going up! This is something that most, if not all, Noun holders hope for. There is already some incentive for this: the secondary market price for Nouns moves with auctions, and so the value of one’s Nouns moves with auctions. But the incentive here is more direct and collective.
On a long timescale, I do think the effectiveness of the DAO can be measured in the Nouns auction price. I think it is good to have this included in a code-level mandate for the DAO.
After the fork, the daily Noun auctions can offer an arbitrage. If one can (1) purchase a Noun for below its implied “book value” (the value of the DAO assets it could claim in a fork) and can (2) actually fork with this book value or greater (it’s possible the DAO spends before the next fork, decreasing book value), then one can profit. Today, the book value of Nouns is around 35 ETH and the most recent auction settled at 19 ETH. This difference represents a possible “risk free value” trade. Though the “risk free” part depends on your perspective of on (1) how long until the next fork and (2) how much the DAO will spend between now and then.
In general, I don’t have an issue with people being able to fork with a value greater than what they paid for their Noun. In a fork, everyone should get their fair share. If someone purchased a Noun at a low price, and then was part of the DAO while assets increased, they should get to fork with a value greater than their auction price.
But I think that purchasing a Noun with an immediate free upside should not be a thing. With the burn, if auctions trend below book value, the difference will be burned (if it isn’t spent). You should at best be able to purchase a Noun slightly below book value and have to work with the DAO to create all additional upside.
It is my hope that adding the burn mechanism and eliminating the risk free arbitrage helps reframe the valuing of Nouns away from claims on the treasury and towards what I think are more exciting and appropriate lenses: vote power, meme value, etc.
Thanks for reading. I hope this helps start a productive discussion and leads to a better future for Nouns. Thanks to many Nouners and others online for discussing this with me and helping sharpen the ideas. Sorry for being long winded and unclear: I am trying to get this out sooner than later.
*Forgive me for being a loser and quoting my own blog.
**With the fork mechanism now in place, Nouns in some instances do represent a claim on the treasury. I accept this as a necessary minority protection: Nouns should be able to take with them their fair share of assets when starting a new DAO. But I resent the mechanism to the degree it has been used solely for personal gain: buying with the only intention to cash out at a gain via funds others paid in.
***I think that Nouns held by the treasury should be discluded from the burn computation, just as they are not included in Fork calculations. As the treasury currently holds many Nouns, there would be an additional incentive from the threat of the burn to distribute these Nouns.