Community Discussion: Exploring Future Use of Protocol Fees

General
21

The trade-off often discussed is between growth and value capture for token holders.

Right now, technically, both traders and token holders are benefiting from protocol-owned liquidity (more liquidity, book value). Thus, it seems like an efficient use of funds, all things equal.

However, you have to consider the current state of Drift’s financials. Outstanding FDV is $200m. Book value (PoL) is at $40m. Annualized earnings are at $40m. Also, a big portion of tokens is in the community fund and already unspent (and at current rates, won’t be spent perhaps ever).

I believe the best option right now is buyback-and-burn with almost all revenue. Arguments for:

  • This is not an anti-growth strategy.
    • Seeing the success of buybacks of e.g., HYPE, a higher DRIFT price allows the foundation to monetize their balance sheet tokens more efficiently if need be.
    • Flywheel from a higher token price positively influences all future campaigns, including the current DRIFT incentives to traders.
  • Setting up a buyback-and-burn would remove any doubts in the market about DRIFT’s value capture, leading to a higher sustained earnings multiple.
    • I recommend burning tokens because there are enough tokens for incentives for a long time. By normal accounting, the FDV should be the Outstanding FDV (as per DefiLlama) and not the FDV people think Drift is at.
    • As I understand, at least in the mid-term, the development is well-funded enough for this not to be an immediate are where to drive fees.
  • Buying back tokens at the current P/E ratio of 4-5 is almost unprecedented for a crypto protocol.
    • Should not underestimate the positive impact of DRIFT performance heading into v3 upgrades.
    • If the multiple goes >10, the ratio of PoL vs. buyback-and-burn can be adjusted lower. Ultimately, the dev team can be paid out from a portion of the fees, too.

TLDR: the current financials support buyback-and-burn as the best growth strategy with 100% of revenue, not just a financial value one to token holders in the short-term. A higher DRIFT price means more bang-for-the-buck on all incentive campaigns in the future and better fundraising opportunities for the dev team.

Impact of this proposal is easy to test out in practice. Setup a MetaDAO market and see how the price converges based on this. I believe the market will give a clear answer.

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