GIP-100: Should Gnosis DAO conduct a large-scale buyback program?

[Nay]

GIP-100: Should Gnosis DAO conduct a large-scale buyback program?

• In Favour
• Against

GIP: 100
title: <Should Gnosis DAO conduct a large-scale buyback program?>
author: <Nay, Thanefield Capital>
type: <Meta>
created: <2024-05-17>
duration:<6 months>
funding:<$30 million>

Category

Treasury

TL;DR

I represent Thanefield Capital, a multi-strategy crypto fund; GNO is one of our thesis-driven investments.

Currently, GNO is significantly undervalued relative to its book value. To address this, we propose initiating a large-scale buyback program. Our plan involves deploying $30 million, representing about 5% of the estimated assets of Gnosis DAO, over a six-month period.

Introduction

Gnosis DAO has consistently been at the forefront of innovation, successfully developing and launching products such as Safe and CoW Protocol. These initiatives began as internal projects and were later spun off into independent ventures. Despite these successes and several previous rounds of buybacks, the GNO token has not adequately reflected the value generated by these and numerous other activities.

GNO is currently trading below its book value, considering only the marketable tokens owned by Gnosis DAO. This valuation suggests that the market is assigning a negative value to all other Gnosis DAO assets. These assets include, but are not limited to, Gnosis Chain, Gnosis Pay, Gnosis Wallet, Circles, a venture capital portfolio of over 40 companies, and investments in four crypto VCs. This means that long-term GNO holders have not financially benefited from the DAO’s successes in product development, venture investments, and treasury management. Additionally, it becomes uneconomic to allocate any GNO that already belong to the DAO for ecosystem growth or other initiatives, as it would result in a negative value transfer for the DAO.

Gnosis DAO is well-positioned to address this undervaluation as one of the most capitalized DAOs, holding over $630 million in assets and ranking second only to Mantle in terms of non-native marketable tokens. We propose initiating a substantial buyback program to correct this disparity. If approved by a DAO vote, @Karpatkey will manage the execution of this program.

It’s important to note that this proposal operates independently but complements the vision outlined in Gnosis DAO v3, which aims to establish protocol-owned liquidity between GNO and portfolio projects. If approved by the DAO, these initiatives should progress concurrently.

Objectives of the program

1. Transfer value from sellers to long-term holders by acquiring GNO below its intrinsic value. The acquired tokens could then be utilized for treasury swaps, incentives, growth initiatives, and further investments.
2. Signal to the market a commitment to establishing a valuation floor for GNO that consistently exceeds its book value.
3. Drive attention to the products of the DAO. Given the attention-driven nature of the crypto market, where price often influences fundamentals, large-scale buyback program can elevate both market perception and fundamental value.

Gnosis DAO assets breakdown

This discussion is centered on the marketable tokens and illiquid venture deals & investments in venture capital funds, specifically excluding other significant assets like Gnosis Chain, Gnosis Pay, and Gnosis Wallet.

1. Marketable tokens

As of today, Gnosis DAO holds $631 million in tradable tokens, not including GNO (this number corresponds to the assets that belong to Gnosis DAO that we could locate onchain). This figure serves as a foundation for valuing Gnosis DAO’s assets. It’s important to note that not all these assets are immediately liquid. For example, approximately half of the SAFE token allocation is yet to vest. Furthermore, a significant portion of both SAFE and OLAS tokens has been voluntarily placed into lock-up contracts to demonstrate commitment. The primary assets in the treasury include ETH and equivalents, SAFE, stablecoins, OLAS, and COW. In 2023, the treasury generated $10.2 million by engaging these assets in DeFi activities.

Additionally, Gnosis DAO has a 50% stake in the Safe <> Gnosis joint treasury, which owns 5% of the SAFE token supply, valued at approximately $115 million currently. These assets are not included in the above calculation.

2. Illiquid venture deals

According to the list published by Ernst on this forum, Gnosis DAO has made about 50 venture investments over the years either directly or through in-house Factor VC.

Investments that remain illiquid/are not located include:

Flashbots, Matter Labs (ZKsync), Aztec, RISC Zero, IDEX, Succinct, Orca, Anoma, Zerion, POAP, ImmuneFi, WalletConnect, Kinetex.io, Fileverse, NFTfi, Li.Fi, Hedgey, Azuro, Harbor, Snapshot, Diva, Phaver, Rated Network, Mimic.fI, Sablier, Coinshift, Vibe.xyz, Parcel, Mean.finance, Collab, AMMalgam, Topos, Bootnode, Stablelab, Backed, Least Authority, Cypherock, Gateway.fm, Den, Mystiko, Shutter, Altlayer, Karpatkey (spinoff).

Additionally, Gnosis DAO is an LP in the following VC funds:

1kx, Lightshift, LongHash Ventures, Seed Club Ventures.

While it is challenging to precisely value these illiquid venture deals due to many unknown variables, this portfolio includes high-profile deals and ensures growth in Gnosis DAO liquid treasury as these tokens launch and vest, widening the discount at which GNO is currently trading.

Gnosis DAO’s GNO holdings

According to CoinGecko, the circulating supply of GNO tokens is listed as 2,589,589, which is valued at approximately $703 million. However, this figure does not include 1,050,884 GNO tokens owned by Gnosis DAO, many of which were acquired through buybacks and are unlikely to be released into circulation, at least before GNO is back to its book value. Therefore, the actual circulating supply is reduced to 1,538,705 GNO, amounting to approximately $424 million.

GNO book value

With our ballpark estimate of the venture book & investments in VCs at $100 million, we arrive at $730 million in assets. With the current GNO real market cap at $424 million, it’s currently trading 42% below its book value of $475. To reach its book value, GNO has to appreciate by about 72% based on current numbers. Since the treasury contains volatile assets, it should be calculated dynamically as the program progresses.

It is important to note that the book value of GNO does not fully represent its intrinsic value, which should also account for future cash flows generated by the DAO. Therefore, the book value should be considered merely a baseline or minimum value before the DAO decides to spend any GNO it already owns or acquires through this program.

Proposed execution

To address the undervaluation of GNO and effectively utilize the treasury assets, we propose allocating approximately 5% of the treasury funds, amounting to $30 million, for a structured buyback strategy. This amount will be divided into two distinct parts, each employing a different strategy to optimize the overall impact.

1. CoW-TWAP

• Allocates $15 million over 6 months;
• Executes orders at any price below the dynamically calculated book value of GNO;
• Results into $83,333 daily buy pressure.

2. Discretionary, executed by Karpatkey

• Allocates $15 million;
• Provides Karpatkey with full discretion to capitalize on the best opportunities.

Assessment

After the conclusion of the program, we should assess its results and consider whether to continue, modify, or end the buyback strategy going forward.

[Wunderbernd]

Thank you for your detailed proposal.

Over 50% of my entire crypto portfolio is in GNO, so I would benefit massively as an investor, but imo it is way too early to spend the money for buybacks. The only relevant metric is the FREE Cash flow, I don’t think we have the numbers and I think it is still negative at this point. Gnosis is just starting to launch the 3.0 phase with new apps like the GNO VPN, GNO pay etc., GNO Chain is still in the development phase. It makes much more sense to invest the money in new apps/the current apps. We need multiple DAPPs which generate enough cash flow, before we can think about buybacks.

For immediate measures, I suggest that we improve the utility of the GNO token. The lending market situation still hasn’t improved.

I also think that the 30 mil are not really relevant in the current market conditions. We can start to pump again and the market cap can easily increase 200-300 million in a couple of weeks. We can also get the opposite and 30 mil buybacks won’t make a difference.

I think that buybacks will be necessary at a certain point though. The current crypto space is dominated by unsophisticated gamblers, GNO will attract more attention atm with launching a memetoken. I like to compare crypto protocols like AAVE, MKR, GNO with the “old economy” stocks like cement companies etc., they generate revenue, but they are not the new fancy thing, so they have to return the capital to the investors at a certain point.

[Nay]

Thanks for your response.

The DAO holds a massive treasury of $630 million, which as stated in the proposal is the second-largest treasury of any DAO. The choice you explained, between investing funds into r&d and doing buybacks, doesn’t exist. The DAO has more than enough assets for both and more. In fact, to the best of my knowledge, Gnosis DAO assets are not used for r&d – it’s funded by Ltd. – which is a separate well-funded entity. It is, in this case, cashflow positive.

Buybacks have been concluded before, in the last year the figure is comparable (although smaller) to what is proposed here. This proposal is aimed, above all, at providing structure to this program and signaling the market intentions of the DAO. Given that GNO often trades in a low single-digit $million of daily volume, I think you underestimate the impact $30 million of buybacks can make.

An important point is that Gnosis DAO holds 40% of the circulating GNO, which it can’t currently spend on growth because this would result in a negative value transfer from long-term holders. Bringing GNO back above the book value is not merely “pumping our bags”, it’s actually in the best interest of long-term GNO holders because it will enable growth initiatives.

[mkoeppelmann]

Thank you @Nay for the proposal and @Wunderbernd for the comment.

First, I very much agree with @Wunderbernd is that the relevant metric is “free cashflow” or how I would call it: producing goods and services that provide so much value that users are willing to pay for it.

Now I do think that Gnosis has produced a bunch of those products:

• the chain itself
• Gnosis Pay
• EURe on Gnosis (https://uramp.gnosis.io/)
• Cowswap (on Gnosis)
• lending markets on Gnosis (where Gnosis has partially a stake in (Spark))
• …

So while we continue to do R&D and starting new ventures (e.g. GnosisVPN, AI agents, potentially some prediction markets plays again) I think it is now crucial to focus on (user) growth of the products mentioned above. The result should be much more users using our products and paying fees (or how you call it: “free cashflow”).

Now, for such a growth program we should spend money and it does make sense to use GNO here, as we want as many as possible of the users of Gnosis chain also be owner of the chain (aka GNO holder) as we generally believe in distributed ownership but also out of pure self-interest think a more decentralized chain can be more valuable. (credible neutral blockspace will be more valuable than centralized blockspace with some security guarentees (most L2s)).

So long story short - I think it is time to do a large user growth GNO incentive program. (it needs to designed in a way to actually attact real people and not just a “farming program” that gets “farmed” with capital and of course it should also not be Sybil attackable).

If we spend GNO for incentives we are essentially “selling GNO” to finance “growth expense”. Now this is the point where the GNO price matters - if we are selling GNO we don’t want to sell them below what they are worth.

So in summary - I am in favor of this proposal if it is connected to a growth program where the GNO aquired in the buy back are consequently used to attract more user. I had been working on such a program for a while and share more here is the forum soon but will also present those ideas at my “Circles 2.0 talk” at Dappcon next week. (spoiler: Circles can help addressing the challenges mentioned above) and can yet be another “product” that attracts users to Gnosis.

[Wunderbernd]

I just want to say that we added around 100 mil in market cap today

[refri]

Thanks for this proposal, I can understand it from an investment point of view focusing on capital gains of an investment.

But actually, who is really benefiting from buybacks? In short term only the ppl who like to get out of their investment (or at least reduce it) while it makes it more expensive for ppl who like to start or increase their exposure.

As long as we like to grow our user (and holder) base, I don’t see a need to artificially increase the price of gno by buybacks, but would favor to attract ppl by pointing to your very well summarized undervaluation of GNO.

[RaulVolker]

While I agree with you - some people will just sell their position once buybacks kick in and gno price appreciates - i don’t think your argument is valid overall. I think there are two perspectives on this that show buybacks are very reasonable in this situation

1. Sure, if the dao can invest in projects that are even more profitable than buybacks and/or are important to the gnosis ecosystem then it should prioritise that. However it seems very unlikely all of the funds currently held by gnosis dao will be used for that. And then buying back tokens undervalued just means you can create value for gno holders or sell/spend them again (e.g. in a way martin suggested) once gno is not undervalued as much anymore

2. taking your argument to the extreme, it would not hurt gnosis dao if gno price went to $1 right now. that is simply not true. once again - i agree with you that making more profitable investments or making good investments into gnosis ecosystem is more important, but you cannot rule out creating value for gno holders at some point, otherwise there won’t be many gno holders left (like why would you hold the token longterm if the token doesn’t hold any value?).

imo a gno price appreciation will lead to more interest in gno, more interest in gno ecosystem, that leads to higher gno price again and so on.

i have no idea why gno is so undervalued, but this looks extreme enough to take advantage of the situation

[gno-investor]

Thank you @Nay

I would like to see a program for unlimited buybacks of GNO tokens on the open market whenever they are trading below book value (as they are now). This strategy would provide several compelling benefits:

1. Zero-Risk Investment: Buybacks below book value represent a zero-risk investment for token holders, as the value is directly returned to them. This ensures that capital is utilized in the most efficient manner, directly benefiting all token holders.

2. Market Confidence: Announcing a clear commitment to buybacks can significantly boost market confidence. Often, the mere announcement of such a policy is enough to prevent the tokens from trading below their intrinsic value.

3. Internal Confidence: When a DAO undertakes buybacks, it signals strong internal confidence in the project’s future. It shows that the community and governance believe in the long-term success and stability of GnosisDAO, reinforcing trust among token holders.

4. Optimized Capital Allocation: This strategy aligns with intelligent investing principles, ensuring that the capital is deployed where it can generate the highest guaranteed returns for token holders. Unlike other investments that might carry risks, buybacks below book value offer a sure way to enhance token holder value.

Given GnosisDAO’s 9-year presence in the market, it is clear that this is not a short-lived startup but a well-established entity. With ample capital reserves, GnosisDAO is in a strong position to invest heavily while taking advantage of this optimal investment opportunity. This unique situation positions GnosisDAO as both a growth and value investment, which is highly unusual and advantageous.

I support this proposal, but it would be even better to create a permanent mechanism to ensure that GnosisDAO can continuously execute buybacks whenever GNO tokens trade below book value.

[refri]

I completely agree with you that buybacks might be useful if there is nothing else to use the assets, that are more valuable.

But despite the large treasury I don’t see what we shall sell for GNO:

• Eth & equivalents which are in use by Karpatkey to earn income and as collateral and to foster liquidity on GC?
• Stables which are also much needed there till other parties will join?
• Many other assets, like OLAS or COW that hardly have enough liquidity to be sold in such a volume without major price impact.

Maybe @Karpatkey can tell us if there are really funds not needed for other, more important, purposes.

And looking at the 1 year chart of GNO

I don’t see why there is need to push the price. Will this really increase interest if this should be the main reason to do this?

But at last I must admit: I don’t mind to get some more GNO for cheaper than book value;-)

[gno-investor]

On this topic, it would be more informative to see a graph comparing Book Value/Market Value. A price number on its own doesn’t provide the full picture.

[refri]

agree, but if price increase is mentioned as a topic to increase interst in the project this seems sufficient to me.
And regarding book value there are also some obstacles especially how to value the locked or low trading volume assets.

[RaulVolker]

i don’t see why earning few % farming eth (and paying fee for that to karpatkey) can ever be better than buying an asset that is trading massively under book value.

imagine it wouldnt be GNO but another comparable asset trading a lot below book value - rather farm for like 3% or buy an asset >20% below book value?

[Nay]

Your assumption that during the period you reference there were no buybacks is incorrect. In fact, the amount of money spent on buybacks during this period is in 8 figures.

This proposal, among other things, aims to give this process the structure and signal to the market that the DAO is committed to bringing the price above the book value. Alternatives are executing buybacks quietly or not executing at all, both of which I would argue are suboptimal and don’t lead to generating more interest and activity in the DAO. It’s in the Gnosis DAO’s interest to take initiative rather than being reactive. In this case, hopefully, we can get to a situation where GNO is trading above its book, no more buybacks are needed, and GNO could be spent on other initiatives because more people view it as a sound investment.

Like it or not, the price matters - it attracts holders, builders, community members, and more people hearing about Gnosis and are willing to try its products as all of them are targeted at crypto users/holders. The same process works in the opposite direction.

[refri]

It’s not all about the calculated apy: How to value liquidity that is essential for gnosis chain (still low compared to many other ecosystems)? Attracting people to use the gc ecosystem needs seems to me of much more importance than the gno price. If buybacks are able to help I will not oppose, but right now I am not convinced.

Giving value back to investors can be another reason for buybacks, and to me this seems here the main focus. But as I said above: it will only benefit those who like to sell. All others will be happy to buy more undervalued assets over time. Or they are not really convinced about the valuation, maybe cause of the still not so clear structure/relationship of DAO, Ltd, Karpatkey and so on…this is something I would agree on.

[refri]

sorry had issues editing hope it workes this way

@Nay

It’s in the Gnosis DAO’s interest to take initiative rather than being reactive.

totally agree on this! IMO these buybacks should have been discussed/communicated before!

edit:
But still I am not convinced that more buybacks are needed right now. A clear DAO structure where it is clear for everyone who is deciding about what, and where the information is easily available to the whole community seems more urgent than ever to me. And this might also have a more sustainable effect on the price, cause it generates trust

Anyway: glad you brought this up.

[Wunderbernd]

1. taking your argument to the extreme, it would not hurt gnosis dao if gno price went to $1 right now. that is simply not true. once again - i agree with you that making more profitable investments or making good investments into gnosis ecosystem is more important, but you cannot rule out creating value for gno holders at some point, otherwise there won’t be many gno holders left (like why would you hold the token longterm if the token doesn’t hold any value?).

Ofc you talk about the extremes, but this is actually the case for me atm. It doesn’t make a huge difference for me if the GNO price is 400$ or 250$ atm.

What is the current GNO utility?

1. You can validate the Chain → you earn more with a higher GNO price
2. You can use Defi (amms) → You pool GNO with other assets and have IL
3. Lending markets → The current lending markets have isolated markets and bad LTV

As someone who doesn’t want to sell his GNO because I think it is undervalued, only the first option is attractive right now.

If we compare ETH with GNO, a reason why the ETH price is so stable, is because they have efficient lending markets for ETH. ETH maxis don’t have to sell their ETH, they can just borrow against it.

In my opinion we have to improve the utility of the GNO token to maximize the benefits of buybacks.

[refri]

agree on these topics but like to add one more reason why ethereum is more resilient than $GNO: it’s a much larger crowd looking at it and thereby stabilizing the price. As pointed out above, a single entity can move the $GNO price much and these decisions, at least I suppose, are done by very few ppl controlling directly and/or indirectly the majority of $GNO.
Although I am convinced they did it with the best intentions this should be prevented in the future.

Some algorithmic buybacks might be good, even a decision of the DAO to hand over the ability to decide about certain specifics to a entity like karpatkey might be fine in some situations. But at least after a trade (or a series of trades) was done this has to be published along with the results. Or did I just missed this in the regular updates from karpatkey?

[john_szczepaniak]

Thank you for the detailed and well-written GIP @Nay. GNO trading well below its book value does present challenges in regards to the growth flywheel of Gnosis (and more generally any project in web3).

Yet, crypto is still largely a game of hot potato or musical chairs with folks either farming incentives (airdrops, points etc) or VCs dumping on retail. For the most part, the new shiny projects, new infra or new products see the same hot potato of capital move through with the same dynamics at play. While a higher GNO price would be great, the question still remains - if most token holders are fickle, how do we introduce a level of stickiness around GNO?

I agree with @Wunderbernd @mkoeppelmann and @refri - we want the community of GNO token holders to materially share in the upside of Gnosis becoming broadly relevant. I believe we achieve that through finding real product market fit by building products people actually want to use and funneling them in through GNO incentives to spark the flywheel. There are many things to address that we could fold into GNO incentives as Gnosis 3.0 products are still in their infancy. Or simply improving the liquidity of money markets on Gnosis Chain seems to be something critical to solve for as we position Gnosis Chain as the payment chain - a key building block if we want to be broadly relevant.

At this point in time, I would rather see $30 million spent on building killer products that resonate with real, everyday people. GNO trading under its book value presents an asymmetric risk/reward, an opportunity for the Gnosis community to participate in the upside. I’d rather be in this position than having an overvalued GNO price as most would view the upside as exhausted. While I think your GIP is aimed at the right goal, I support the comments voiced by the community.

[owl.gno]

Thank you so much for the GIP, I am a big fan of it.

Like most of the participants in this discussion I agree Gnosis is extremely undervalued. I also agree with them that our treasury should be an important asset to create new businesses and cash flow positive projects.

However I don’t agree with them that Gnosis price doesn’t matter, in fact I think keeping a floor in the price of Gnosis when we are extremely under book value is very important, as Gnosis is our biggest asset in the treasury and it can be used for all of the investments discussed here.

Long story short, higher Gnosis price means more firepower to create and invest in future EV+ products.

[eklureuil]

Pretty interesting topic and discussion.
While at first sight, the proposal was very interesting (as i do believe $GNO is very undervalued by the crypto market at the moment), it seems to me that the DAO could make a better use of the treasury.
One point that came during the previous answers is the lack of lending markets for $GNO (isolated pool on Aave, cant be used as collateral on Spark, and Agave is retiring). The only option for $GNO holders is to sell (not even talking about leveraging their position).
Maybe some kind of incentives could be deployed in this direction ? Or bring back the discussions ‘Gno as collateral’ with Aave/Maker teams ?