Bonding and Staking: Growing a Robust Treasury

Educating the DAO on core protocol mechanics

We laid out the vision for our grand strategy RPG in our last piece. In that piece, we discussed where our gaming team is now, where it’s headed, and how the gaming side of our DAO will contribute revenue to the protocol over time. In this piece, we’d like to focus on one of the other core pillars of growth for our protocol: bonds. We’ll provide an overview of how bonds work and also discuss RomeDAO’s goals in managing bonding revenue in connection with staking rewards.

What is a bond?

Bonding is the primary means by which RomeDAO acquires assets for its treasury. When participants bond, they are actually selling their assets in order to buy ROME directly from the protocol, typically at a discount. At any given time, the protocol will quote the bonder with the amount of ROME the bonder will receive. A key difference, however, is that you don’t get the ROME up front. Instead, it vests over a pre-defined period (currently 5 days, or ~32000 blocks) and becomes redeemable linearly as it vests (i.e. in a 5-day term, after 2 days into the term 40% of the rewards can be claimed).

How do bonds work?

RomeDAO sets the capacity for how much of an asset it wants to intake and, correspondingly, how much debt (i.e., what remains owed to the bonder) it wants to accrue in connection with that particular asset. The protocol will then attempt to keep this capacity filled at all times through what is essentially a dutch auction process. If the protocol has filled up all it wants on a particular asset, there will be zero (and even sometimes negative) discount available for any participant seeking to bond that asset. However, over time, the debt will vest and capacity will open up. As this happens, the discount will grow in size until it finds a bonder willing to bond at that discount.

Why should I bond?

The expectation is that bonds will give you some amount more ROME than you would get if you bought on the market and staked. How much more is determined by the discount available at the time you bond and the rate at which you claim and stake your ROME as it vests. For example, if the discount for a bond that vests over 5 days is greater than the 5-day yield for staking, then it may make sense to you to bond instead of buying and staking. This is compounded by the fact that you can claim and stake your bond before the end of every epoch (~8 hours) and begin earning staking rewards while your bond vests. These strategies, however, are more active and you should only do what makes sense for you.

What assets can I use to bond?

RomeDAO determines which assets it wants to acquire and in which capacities and this list of assets can and will change over time. However, they largely fall into two different categories:

• Reserve assets (e.g., FRAX, MIM, WMOVR, gOHM, etc.)
• Liquidity assets (e.g., ROME-FRAX, wsROME-gOHM, etc.)

RomeDAO must balance, at all times, the mix of assets in its treasury and will increase or decrease its bonding intake for each type of asset to accumulate more or less in accordance with its risk appetites and its long-term strategy. To build a sustainable foundation, RomeDAO has focused initially on accumulating two types of assets in its initial bootstrapping phase: (1) stablecoins and (2) liquidity for ROME. However, it is either already accumulating, or planning to begin accumulating shortly, other strategic assets such as WMOVR and gOHM.

Why doesn’t ROME just crank up the capacity on all its bonds and build its treasury quicker?

Low capacity means less ROME offered to the market at a discount. High capacity means more ROME offered to the market at a discount. More ROME offered to the market at a discount means (1) less ROME being bought on spot markets; and (2) more staked ROME being unstaked and sold to bond for even more ROME (i.e., the staking-to-bonding strategy). As you can see, this both reduces buy pressure and increases sell pressure for ROME itself.

Bonding is necessary as it is the primary source of revenue for the treasury in these early days. The DAO, however, monitors and tunes bonding capacity for the long-term health of the protocol, balancing the needs of the treasury against the effect on the market.

In other words, rather than overbonding, which builds treasury very quickly but potentially collapses market price, we aim instead to build treasury slowly but steadily over time, waning off bonds in favor of sustainable revenue sources like our NFT marketplace and other core sources of yield.

Why does RomeDAO seek to build a treasury?

RomeDAO aims to build a free-floating, decentralized reserve currency that’s foundational to the Dotsama ecosystem and that is backed by a basket of decentralized crypto-assets in its treasury and by the revenues generated by the DAO. Initially, our focus has been on accumulation of FRAX, MIM and other risk-free assets to build a secure foundation and ensure resiliency. We will continue to hold the majority of our reserves in these assets but, because the purchasing power of U.S. Dollar-pegged stablecoins only decreases over time, the DAO plans for ROME to become increasingly backed by reserve assets that are decentralized and native to the crypto-economy. As we will discuss in a later article, we believe gOHM to be the driver of that strategy.

Because ROME is a free-floating asset, the market determines the value of ROME based on a number of factors, including (1) the total supply of ROME, (2) the value of RomeDAO’s treasury, and (3) projections of growth for the protocol based on its current and future revenues and the ecosystem in which it resides. RomeDAO can’t directly control the premium assigned by the market for this last factor. It can, however, exercise control over the first two factors.

For the first, the DAO determines the rate at which its token supply inflates. For the second, the DAO determines the assets that it accumulates in its treasury, the rate at which it accumulates them, and the deployment of those assets for the growth of the treasury. Its goal as a DAO is to carefully manage these levers so that the amount by which ROME is backed grows sustainably over time.

Let’s dive in on the basics for why this is the case.

Is supply inflation bad for me?

That’s a complicated question but let’s try to simplify the answer. Let’s say there are 100 tokens in circulation owned by 100 different people. If a protocol decides to double the token supply by giving each existing holder 1 extra token, does that devalue the existing holders? The answer is no, each holder continues to hold 1% of the token supply. Does it, however, decrease the perceived value that outsiders will have for each individual token? Absent any other changes, the answer is most likely yes–each individual token now represents only .5% of the token supply, or half its previous value. There are two obvious but key takeaways here:

If supply inflation is going equally to all existing holders, it doesn’t, by itself, actually increase or decrease each holder’s voting interest or each holder’s share of the pie. Supply inflation does inherently reduce the perceived value of each individual token, absent any other changes.

Let’s explore these two points in the context of ROME.

How does the total supply of ROME increase?###

Currently, there are three sources of inflation for the protocol:

• Staking Rewards: The protocol mints a certain percentage of the total supply of ROME every epoch (~8 hours) and rewards this ROME to those holders who have staked their ROME with the protocol. This mechanism is how the protocol distributes to holders their share of the growth in the protocol.
• Bond Payouts: As mentioned above, in order to acquire assets for the treasury, the protocol must sell ROME to the public through bonds. In order to do this, the protocol will mint ROME each time it sells a bond. This additional ROME that is minted and granted to the bonder is an expense the protocol pays to grow its treasury, including its protocol-owned liquidity.
• DAO Expenses: In order to develop the protocol, pay DAO contributors, and conduct other market operations for the benefit of the DAO, the protocol currently adds, for itself, a 10% fee on every ROME that is minted and sold to a bonder through a bond. If a bonder receives 1 ROME as part of a bond, the DAO will mint and set aside .1 additional ROME for the DAO treasury. From this DAO warchest, RomeDAO will make distributions that are approved and authorized by the community.

Today, the vast majority of ROME supply inflation (~75%) occurs through the staking rewards. This is because RomeDAO strictly manages the bond capacity so that it does not overly dilute existing stakers. There are many other projects and protocols that employ similar mechanics but do not do this and, as a result, they may build treasury and backing very quickly but shortchange existing stakers and ultimately collapse their market price.

So, going back to the first takeaway, if a participant stakes their ROME with the protocol, they are capturing the majority of the supply inflation that occurs naturally through the protocol. The remaining inflation that they are not capturing (unless they are active bonders or paid contributors to the DAO) is going toward necessary expenses for the protocol: (1) bonding to accumulate assets for the treasury and (2) expenses to operate and manage the protocol.

Why is bonding to accumulate assets for the treasury a “necessary” expense?

For that, let’s explore the second takeaway, which is that supply inflation will likely reduce the perceived value of each individual token, absent any other changes.

What can counteract the effect of supply inflation on the perceived value of each individual token?###

Another complicated question but let’s again try to simplify the answer. In the example above, where there are 100 existing tokens with 100 different holders, let’s further assume that the treasury holds $100 and therefore each token is backed by $1 in the treasury. Nonetheless, the token trades on the market at $100 per token (or 100x the backing per token). This premium that the market assigns may be for a number of different reasons: projections regarding future growth, projections regarding the ecosystem the project is connected with, faith in the strength of the community, etc.

Whatever the case, let’s imagine that the protocol, prior to doubling the supply of the token, first sells 1 token to the market in exchange for ~$99. What’s the new state of the protocol? There’s now almost $200 in the treasury. Instead of 100 outstanding tokens, there are 101 outstanding tokens. All existing holders are slightly diluted because they have slightly less than a 1% interest in the overall project but perhaps they don’t mind too much because the treasury has roughly doubled. And now, when the protocol doubles its supply, it has a doubled treasury to back it up, which strengthens the perceived value of each individual token.

This simple example, blown up to scale, illustrates the core mechanics for RomeDAO’s bonding and staking mechanisms. The token supply is inflating through the staking rewards. Most of this inflation is going toward stakers, which encourages them to continue staking. The remaining inflation is essentially an expense that stakers are paying to ensure that the treasury grows commensurately with the token supply and ROME’s backing per token remains steady or grows.

How does the protocol grow its treasury?###

Currently, there are three sources of treasury growth for the protocol:

• Bond Revenue: As discussed above, the protocol acquires assets for its treasury through bonding. If ROME is trading at, for example, $100 per ROME, it can mint 1 ROME for a bonder (and .1 ROME for its own DAO fee) and sell it at $95, collecting that amount for its treasury. As long as ROME trades at a premium to its backing per token, this activity has a net positive effect on ROME’s backing per token.
• LP Fees: Because RomeDAO owns 99.8% of its own liquidity pool (acquired through bonding), it receives 0.20% in fees any time a participant swaps assets within the pool. The fees accumulate within the LP itself and grow the treasury without addition of any ROME to the total supply so this revenue increases the backing per ROME. As the protocol begins to bond other LPs, such as stable-to-stable LPs, and as trades increase in volume and size through these pools, we expect the revenue from this source to grow.
• Staking Rewards: RomeDAO stakes a portion of its liquidity pool with Solarbeam in exchange for liquidity incentives in the form of SOLAR. As with LP fees, no additional ROME is minted for this source of revenue so this activity increases the backing per ROME. As the protocol deploys its treasury in other yield generating activities over time (e.g, staking to earn gOHM incentives through the Proteus program), we expect the revenue from this source to grow.

Just as staking rewards are the primary source of inflation for the protocol in the foundational era of RomeDAO, bonding is similarly the primary source of growth for the treasury today. There are a number of additional sources of revenue planned for RomeDAO, including through its APYRPG and through its launchpad product.

Over time, as we grow the treasury large enough to make it productive and generate significant yield, as we capture the major liquidity rails on Moonriver and Dotsama and earn significant fees as a result, as we earn ownership in high value Dotsama projects through our launchpad, and as we begin generating fees through our APYRPG, we expect these sources of revenue to become a larger and larger proportion of our growth for the treasury.

However, until we reach a state where treasury growth through these other core pillars is sufficient to match our supply inflation, it is important for RomeDAO to maintain its price premium so that it can continue to successfully use its bonding mechanism as the primary source of treasury growth. Which leads us to our final point.

What next?###

RomeDAO has successfully accumulated over $35M in its treasury. This includes accumulation of liquidity greater than $20M and accumulation of risk-free value held in reserve of greater than $15M. With a total supply of ~420k ROME, this means that each ROME is backed by a treasury value of $83 and a risk-free value (RFV) of $36.

As we discussed, in order to maintain or grow this backing per ROME, the protocol must balance the rate at which it inflates supply against the rate at which it grows the treasury.

Currently, this is not a problem. We are inflating supply by, very roughly, ~6500 ROME per day. In order to maintain our RFV per ROME, we’d have to grow the treasury by ~$200,000 per day and, in order to maintain our backing per ROME, we’d have to grow the treasury by ~$500,000 per day. We are actually growing the treasury by anywhere between ~$900,000 and ~$1,200,000 per day (variance based on how we adjust bond capacity). This delta means that we are growing both metrics slowly but steadily.

However, if we stay at the current staking reward rate, all of these numbers above increase exponentially with time. We will reach 1 million supply in about 6 weeks, which is not unreasonable. However, in another 4 months, we’d reach 10 million supply. 4 months later, we’d reach 100 million supply. And 4 months later, we’d reach 1 billion supply. You can see how the compounding effect of the staking reward rate makes the total supply reach exponential levels within a year.

Supply inflation, by itself, doesn’t increase or decrease an existing holder’s interest if it is shared equally with existing holders. It does, however, put downward pressure on the perceived value of each individual ROME token. Left unchecked to grow exponentially, this downward pressure will reduce the market price and, as we discussed, the reduced price will hurt our ability to grow the treasury through bonding.

Our long-term goal is for dividends to stakers to be paid primarily through the revenue that the protocol generates through its other three (or more) pillars. But until we start to grow these revenue sources, it’s important that we use our policy levers to manage inflation (and its corresponding effect on price per token) to maintain our premium and our ability to bond assets profitably. Letting the token supply inflate to 1 billion tokens before we’re ready will be counterproductive to that objective.

So, like OlympusDAO before us, we’d like to propose a framework to the community that allows us to taper the supply inflation over time to levels that the protocol can keep up with in terms of revenue, while maintaining a price premium that allows the protocol to continue to bond assets to grow the treasury.

The policy representatives from each of the houses have been working on a framework for this that will be put to the community for discussion on the forums. After incorporating any feedback from the discussion, the framework will be put to a vote.

For Rome.