Fundraising in the DAO Era: Private or Public Auctions

Fundraising in the DAO Era: Private or Public Auctions

Much has been said about the importance of diversifying DAO Treasuries in the name of liquidity/capitalization.

Today, let’s discuss some of the ways a DAO with a publicly traded governance token might be able to raise capital. Specifically, this article will focus on the pros and cons of private capital, public capital, and three specific structures of public capital auctions [1].

A word of caution: these are all methods of massive diversification (e.g. other than selling tokens on exchanges). Any DAO with a volatile token can obviously be sold on the open market, but due to the relative illiquidity, their capital requirements will generally not diminish without substantial selling pressure on their governance tokens. All of these approaches allow DAOs to alleviate this concern while still raising the funds needed to operate.

private capital

While many compare diversification, i.e. capital, from VC funds to traditional, off-chain private capital raising, an appropriate analog for TradFi might be the model of PIPE (private investment in public equity). Regardless of which similar approach you choose, leveraging institutional investment funds is an easy and common way for protocols to raise capital in DeFi.

So far, the usual practice is fairly simple: the DAO’s governance token is exchanged for a stablecoin or ethereum at a price somewhat lower than its current market price. Discounts vary, but generally, the prevailing practice seems to be in the rough 30-50% range. If that number sounds big, it’s because it is, but it’s usually accompanied by a 2-4 year vesting period and usually includes a one-year cliff, so it’s not necessarily a big deal for investors. A cheap deal. On the one hand, all the venture capital firms that participated in Lido’s heavily discounted $70 million funding round last May probably felt pretty good about the decision. Investors funding POOL’s stablecoin diversification around the same time? Probably not so much. Whether the “right” discount or lock-in trade-off may take some time to sort out, it’s more or less considered standard today.

Positive role of private capital

Much depends on the specific investors involved and the values ​​of each DAO as a community. Of course, in “seal of approval” marketing, you get the benefit of bragging about the brand’s investors. In the week after Galaxy Digital announced a $25 million investment, LUNA was more than 100% priced. Correlation is not necessarily causation, but it’s fair to say that this particular discount to private investment is more than what it immediately pays for itself.

In addition to the marketing value, you also (in theory) gain a long-term partner who can bring relationships, technical know-how and additional governance acumen. This includes a large shareholder who is unlikely to dump your tokens as quickly as individual token holders [2].

As with anything, these two positive side effects vary from investor to investor. Not all VC firms have the same prestige and marketing value, and not all VC firms can be extremely useful, hands-on partners. This may go without saying, but in venture capital, not all capital is created equally.

Disadvantages of Private Capital

The biggest disadvantage here is obvious: stake dilution for token holders, which is at a significant discount to market prices. In DeFi, this can be especially painful because you may feel like you have so many other options for raising capital. Frankly, in the traditional investing world (private or public sector), there is no sector that can gobble up such a discount to the “market value” of a stock when raising money[3]. This doesn’t necessarily make it an unfair deal, but it does understand that the protocol and community would acquiesce to diversify this way.

Down the road, it’s a simple trade-off between the discount of capital relative to the market and the partnership, stability, and marketing value that a given capital brings.

public auction

Another way to raise money that neither hits exchanges nor negotiated with VCs is to auction off some of your funds to the public, which is effectively a version of retail crypto that dilutes subsequent public offerings (IPOs)[4] ]. Auctions can be limited to existing token holders, an invite-only group of potential new token holders, or unrestricted at all; one of the beauty of public auctions is that both the audience and the price discovery mechanism are at least Depends to some extent on the DAO.

Positive effects of public auctions

Here’s something a little different for you to enjoy. DAOs have access to large amounts of capital without having to slowly diversify their investments in the open market and without relying on one institution to cooperate at a price they are happy with. Auctions are always held at below-market prices (which is bound to happen), but the size of that discount may be nowhere near what you offer VCs. The auction itself can also act as a marketplace to drive awareness and usage of the protocol, and this value can compound if the DAO chooses to align the timing of the auction with a product launch or something similar. On the surface, most free market auctions are also pretty neatly sticking to the ethos of DeFi and crypto.

Disadvantages of public auctions

Private financing has a huge downside to consider (dilution at a deep discount), while public auctions have a whole bunch of smaller issues to consider.

The first is the need to promote your event. Auctions only work if people are present, and pricing terms are heavily dependent on demand. The more money you want to raise, the more true this fact becomes. The second is the negative signal from the massive sale of Treasuries—basically any diversification strategy (eg, “If you’re so confident in your Treasuries, why sell them?”) but in this kind of The situation is further complicated by the fact that sales itself depends on the aforementioned marketing. That said, being clear about your intentions and the rationale for raising funds can mitigate negative connotations (eg, “We raised funds specifically to fund projects X, Y, and Z that we are very interested in, and you should also be excited because… . . . ..”).

Finally, OTC auctions require discounts to be effective (otherwise participants can only buy on exchanges), so at least some degree of investment terms is required to avoid price arbitrage. With this fact in mind, it is important to consider the negative impact of large acquisition events, as well as the possible downward selling pressure on auction structures and terms. This can be mitigated by using vesting terms as an auction variable or using refined linear vesting for all participants after the initial cliff. The reality is that individual “retail” investors will never have the same stable of token holders as institutional investors; your auction terms will need to take this into account.

Obviously, there are many different ways to organize a public token auction, and today we will consider three ways. To illustrate these differences, let’s look at a fictional set of bidders in a fictional auction. Also, let’s assume a protocol is looking to raise around $250,000 in stablecoins with a current market price of $50.

To create a hypothetical “demand” curve, I went ahead and created 100 fictitious auction participants, randomly generated purchase prices, using $35 as my minimum price and $45 as my maximum price – 10 relative to the market % the discount of. I also randomly generate the hypothetical desired number of tokens using a minimum of 50 tokens and a maximum of 250 tokens. In the end, I got the required funding size of $250,000 and divided each potential bid price by that to create a theoretical “supply” curve for our auction. The result is as follows:

Fundraising in the DAO Era: Private or Public Auctions

Note that this is not a normal supply curve (hence the quote above), as we are focusing on a single event and a fixed funding figure rather than supply and demand on an exchange. The normal supply will obviously increase as the price goes up, not down.

Now that our boundaries are set, let’s discuss three different auction types and apply them to our bidder set. A very important point to highlight here is this: As with any economic model, this is both an oversimplification and assumes that bidders are rational actors, behaving efficiently in terms of price discovery. There may be some behavioral (e.g., FOMO) and technical (e.g., gas price) realities that lead to imperfections in some of our conclusions, but I think this exercise is both interesting when considering what role various auction structures play in determining price It also has directional guidance. This is especially evident as the cryptocurrency community grows in size and the cryptocurrency market eventually becomes more efficient.

Method #1: Bulk Auction

In a batch auction [5], the dollar value of capital (or a fixed number of tokens) and the minimum price are set in advance by the DAO, and the bidding period for the auction is scheduled. Bidders provide their bids (quantity and their own personal ceilings) throughout the bidding period. Taking into account all bids, the settlement price for the final sale of tokens is calculated as the lowest price at which the dollar value of the capital can be filled, while including the quantity of all higher bids (in the ratio of the lowest bid to the lowest bid to fill the remaining token/dollar value ).

Using the supply and demand curve we created earlier, you can see how this auction structure ultimately falters in theory:

Fundraising in the DAO Era: Private or Public Auctions

As mentioned, the particularly nice thing about batch auctions is that DAOs are able to control some variables that may affect them – you have the flexibility to focus on a fixed raised dollar value (or a fixed amount of token distribution, If you’d rather think so), you can easily set a minimum price. Assuming there is enough demand to satisfy both variables, batch auctions enable price discovery at the individual level, together with collective pricing preferences, to calculate an efficient, “fair” price and allocate DAO’s accordingly based on the intersection of supply and demand curves. Token.

Method #2: Streaming Auctions

In a streaming auction [6], a fixed amount of tokens is set and a bidding period for the auction is scheduled. Throughout the bidding period, participants are free to deposit and withdraw funds to the staking pool that represents their “bid”, the problem is that these deposits do not individually appear at an ideal price, but are based on the number of deposits in the deposit pool, The size of the pool and the current implied price are provided for free to participants, allowing bidders to jump in and out of the pool when the price is lower or higher than what they are willing to pay individually. Auction tokens distribute funds held in the pool in a linearly continuous fashion. If you’re confused, it’s because it’s not a superficially straightforward concept – Locke (the facilitator of such auctions) has made a simple and useful video explaining more or less how it works.

Let’s assume that in our hypothetical auction, we set aside 6500 tokens to be auctioned continuously during our bidding/staking period. Again, we assume that all bidders behave efficiently and rationally (this is a common big assumption, and a lot of assumptions about cryptocurrencies, especially today). Anyway, we ran the auction among fake bidders and here is the result:

Fundraising in the DAO Era: Private or Public Auctions

From a price discovery perspective, the results are very similar to batch auctions. In theory at least, when auction price discovery happens at the level of a group, whatever the precise auction mechanism is, you’ll get a crowdsourced price result where supply meets demand. One advantage of this particular structure is that it is more transparent than a batch auction (that is, participants can see the current price terms, and move in and out as they like). Bidders obviously enjoy this level of transparency/empowerment, which could theoretically also generate perceived demand (read: FOMO) if it appears that more and more bidders are entering the auction pool. That said, if you’re not prepared and willing to act as a stabilizer and bet big on your own auctions to keep prices steady when things go badly, transparency can easily be cut the other way as well. .

The main negative associated with streaming auctions is control. Unlike other auction options, DAOs must set auction supply based on a fixed number of tokens (hence the straight red line in the graph above), rather than having the ability to set a fixed dollar value. If the DAO wishes to set a minimum price, the main method is to simply participate in your own auction, which may result in your DAO acquiring a large amount of its own governance tokens and returning it to the treasury. The DAO can obviously explain this by planning to auction more tokens, but the difference between the net worth of your own investment position is entirely dependent on the demand generated by your auction and therefore more or less out of your control.

Method #3: Dutch Auction

In a Dutch auction, the community pre-sets the dollar value of a certain amount of tokens or capital and schedules the auction’s bidding time. Over the course of the auction, the terms are gradually changed as the auction goes on, in an increasingly favorable way for the bidders – but once the allocations are in place, the auction is over. The DAO can set up a “fixed-grant” or “fixed-price” auction or some combination, depending on preference. In the case of a fixed grant, bids will start at the current market price and size will drop linearly over time to some set discount (5%, 10%, whatever you like). Bidders can buy at any price they like, subject to a set deadline to avoid immediate price arbitrage. Conversely, in the “fixed price” case, the discount to the market is pre-set and the grant period floats over the course of the auction (starting bigger and smaller).

Assuming our supply and demand curve uses a floating-price “fixed vesting” auction, this illustrates a substantial difference compared to other auction structures:

Fundraising in the DAO Era: Private or Public Auctions

Note that this result obviously assumes something different (auctions are indeed conducted “blindly”, with sufficient participation to avoid collusion, etc.), but because Dutch auction price discovery and trading are done individually and not on a group level conducted, so theoretically allows the protocol to capture the best possible value throughout the auction.

Nonetheless, this structure definitely has negative connotations, as you are clearly selling the same token to different people at different prices (the specific economic term for this pricing is quite literally “price discrimination”, which is the same as Airlines have the closest relationship, so this should tell you something). An unsentimental economist will tell you that this negative connotation is nonsense—everyone is trading at a price they are clearly willing to pay. And there are discounts! That said, I don’t know many rational crypto-economists – my guess is that while this is more efficient and better for your current token holders, if you’re particularly concerned about market effects, it’s not Must be a super popular route.

Epilogue

There are many different variables to consider in terms of capital sources and pricing structures when DAOs make decisions about financial diversification and raising capital. The above is not a complete list, but hopefully in the future various protocols and communities will be able to take advantage of this decision and considering the pros and cons of various strategies.

refer to

[1] This is not an exhaustive list. There are many types of auctions.

[2] For publicly traded protocols, DeFi may be too early to consider shareholder optimization, but this stuff does matter.

[3] The only real comparison I can think of is an underpriced IPO, but at least in this case, you could argue that the market price wasn’t set in the first place.

[4] Note that issuing shares on the market is a version of follow-on shares, more akin to algorithmic diversification over time through AMMs. We basically just focus on a single event.

[5] See Gnosis Batch Auctions as an example of this.

[6] See Locke Protocol’s Streaming Auction as an example.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/fundraising-in-the-dao-era-private-or-public-auctions-2/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

Like (0)
Donate Buy me a coffee Buy me a coffee
Previous 2022-08-28 09:49
Next 2022-08-28 09:51

Related articles