Should GnosisDAO establish OWL as a stable coin?

IMO OWL is one of the most undervalued assets Gnosis has. Currently its role seems fuzzy and the potential of OWL is not used at all.

This proposal suggests to morph OWL into an asset backed stable coin - similar to DAI.

Compared to DAI there would be key differences:

  1. Holding OWL should accrue interest. (similar to DSR - but in contrast to DAI all OWL should benefit from this interest) OWL == CHAI
  2. Minting of OWL is (at least in the beginning) primarily done by GnosisDAO
  3. All assets controlled by GnosisDAO are essentially collateral for OWL
  4. In contrast to Maker - GnosisDAO could freely use the assets to do e.g. yield farming

Conceptually this would be a mix out of Maker and Yearn.finance. Similar to Maker an important byproduct would be the stable coin (DAI/OWL) - similar to Yearn essentially people will but in other stable coin (USDC/DAI/…) and hand those over to a mechanism to do yield farming for them.
Yearn is supposed to do this trustless/ noncustodial for you. This though comes with significant downsides: the strategies that can be used are more limited and the smart contract risk is significantly higher. GnosisDAO in contrast can use its reputation and huge asset base.

A primitive implementation can be done without the need for any smart contracts.

Steps:

  1. Vote on a interest rate for OWL (e.g. I’d suggest to start with 10% APY/ there should be rules for how it can be adjusted)
  2. Mint e.g. 10 Million OWL
    (Note - as long as the DAO holds the OWL it does not pay any interest)
  3. Create a yield curve with buy/sell orders on Gnosis Protocol

On day 1 one OWL == one $ (e.g USDC)
10% APY means ~ 1.00026 return per day. So on day one you can buy and sell OWL for 1.0000 on day 2 for 1.00026, day 3 1.0005200676 and so on - till on day 365 it would reach 1.1

With GP v.2. it should be possible to pre-sign those orders with a validity for this day. Potentially a small spread (e.g. 1-5 BIPs) can be taken between buying and selling.

In our example this account would start with 10M OWL and 0 USDC. As soon as people would start buying OWL (you could argue this is actually minting OWL) - the account (and thus the GnosisDAO) would essentially receive USDC and have OWL dept. Now some USDC should always be left in this account to keep OWL always liquid - but most of it should be used in some yield-farming/ investing activity since GnosisDAO needs to beat the 10% it is essentially paying on the 10%. With todays DEFI opportunities 10% seems very doable. In fact - Gnosis is today using its ETH to borrow DAI and e.g. participate in ETH/DAI pools. This can be done tremendously more efficient the DAO gets the stablecoin for issuing OWL.

For all use-cases that need stablecoin OWL should be an attractive alternative - simply because it is earning interest and only add very limited risk (assuming GnosisDAO acts responsible).
The primary 2 use-cases could be

a) liquidity pools (use OWL/ETH instead of stablecoin/ETH)
When GPv2 launches Gnosis could start a big liquidity mining program for GPv2 specific OWL/Token AMMs
b) Prediction markets
Gnosis could start a big liquidity mining program to incentivise OWL funded prediction markets.

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For me to vote in favor of a proposal, I would need to thoroughly understand the expected outcome from first-order thinking, but also think some about the second-order effects that are much more difficult to reason out.

In this case, the proposal as described is beyond my capabilities to fully understand. So not likely I would support it.

How would OWL differentiate itself from other Stablecoins? Why would users prefer it over USDC/DAI/USDT? Why would Dapps integrate OWL vs. any other more adopted Stablecoin?

If it is effectively having a sub 100% collateralization ratio, how can the peg be guaranteed? Especially in cases where crypto prices might fluctuate?

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Very simple - because it would pay 10% per year == increase 10% in value per year against USD.

OWL would have >100% collateral.
In what I described OWL would be minted (kind of without colleteral - but OWL the GnosisDAO hold itself is irrelevant - it is like owning yourself money). The OWL would only really count as soon as it is held by someone else. However - the GnosisDAO would of course only sell the OWL (and not give it away for free). So e.g. they sell $1m OWL for $1m USDC. You can see that now the DAO holds $1m more collateral - the USDC. Of course - since OWL increases in value at this set rate (basically the GnosisDAO pays interest on outstanding OWL) - the DAO would need to use the USDC to generate a yield. If the GnosisDAO can manage to create a yield of >10% it can keep the difference - if it is smaller than 10% it will effectively loose money in this transaction.


Again - there are different mental models to think about this construction: I would say the GnosisDAO would essentially be issuing bonds and would try to establish them as currency but making them very liquid. Another way to look at it is that OWL == yDAI (like in yearn.finance) but instead of committing to a fixed strategy the GnosisDAO can use strategy as they wish. On the other hand the interest rate is a parameter set by the DAO (similar to the Dai savings rate/ DSR) and would only change from time to time. The consequence is the GnosisDAO takes the risk wether or not they can actually achieve that rate. Given the big amount of assets the DAO will hold users have good reasons to believe the DAO will pay out even if it should underperform for some time.

I see. As far as I understand this would not be trustless collateral then? As there is no guarantee that this collateral would still remain within the possession of GnosisDAO. E.g. GnosisDAO could make really bad investment decisions or dissolve itself. But it is the trust in the GnosisDAO always being able to buy back the OWL at 1USD that would hold the peg?

Also, how would OWL hold its peg in a bank-run scenario? Maybe there needs to be some automatic mechanism to liquidate some of the GnosisDAO assets to pay for the redemptions.

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Exactly - this is trusted collateral.
I do think GnosisDAO would be generally trusted. People are trusting centralized exchanges and services like BlockFi. Compared to those GnosisDAO is much more trustworthy:

  • all assets GnosisDAO holds are auditable in real time
  • all investment decisions/ taken risks are public
  • every decision/ transaction needs to go trough a transparent voting process

I’d say I would much rather trust GnosisDAO compared to an unknown/new team that do it with smart contracts that quite likely can have bugs. However - if trust remains an issue the GNO tokens the DAO posses could be used as ultimate collateral. There can be a trustless mechanisms to automatically sell GNO for OWL is the OWL peg breaks. Given the huge amount of GNO tokens the DAO holds this could potentially very heavily dilute existing GNO holders. So they would have high incentives to make responsible voting decisions to not let this dilution happen.

A bank-run scenario only happens if something is undercolleteralized. Lets assume Gnosis DAO would for some reason loose suddenly 50% of its assets (e.g. yield farming and a contract gets hacked) - in this case I would suggest to make “haircut” as quickly as possible and set the price of OWL to e.g. 0.5 to distribute losses evenly instead of creating a bank-run scenario.

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It sounds like basically the mechanism is designed to raise capital and pay lower interest than GnosisDAO can potentially earn on that capital.
So very similar to issuing a bond.
I’d argue that as long as not all GnosisDAO’s funds are utilized, it’d be better to first utilize the DAO’s own capital without paying any interest. (and demonstrating the ability to generate good returns)
If the DAO can scale to deploy even more capital than it owns, then issuing debt might be a good idea, for example zero coupon bonds.
What are the arguments for using specifically OWL for issuing those bonds?

AFAIK OWL was minted by locking GNO, so with very low cost basis
I think new potential OWL buyers could be worried that existing OWL holders will “dump” on them

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Of course - but to my knowlege Gnosis is using already most of the capital - at least all stable coins.
Note that it is currently easier to get a return on stablecoin then on ETH - so even if you have not used all your ETH you might still be interested in lending USD.

Well - yeah, the DAO would basically need to make a commitment to also buy back those OWL witch should not be a big deal (3-4m outstanding OWL) vs. ~$300m+ assets held by the DAO.

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Why not use a new token? I don’t see why the GnosisDAO should spend 3-4M USD to buy OWL. OWL was created with the intend to subsidize fees on Gnosis build products. Initially this was focused on:

  • Paying half of a liquidity contribution when trading on the DutchX protocol
  • Paying Ethereum transaction fees using the Gnosis Safe
  • Paying fees on Gnosis Protocol, a fully permissionless DEX

Gnosis delivered on all three of these ideas, even though the products were not highly successful and hence the upside for OWL holders was somewhat low. I don’t see why anyone who is not holding significant amount of OWL would vote for a reimbursement of OWL, there is no upside for GnosisDAO.

I resonate with Auction Master to “first utilize the DAO’s own capital without paying any interest and demonstrating the ability to generate good returns”. To my knowledge Gnosis is doing this already, but not GnosisDAO. Before adding additional token economics, I would prefer for GnosisDAO to demonstrate a framework in which it engages successfully in yield farming and thus stresses the value of GNO to the community. First focus on GNO, later OWL can be considered - at least I would not yet vote for OWL at this point.

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Because yet another token (anyone want my Magnolia?) would just be a fuckup. There is value in a token being around for a while - even if OWL was not a big thing yet - just the fact that is a ~1 year long price chart on Coingecko that should a somewhat consistant price of ~$1 helps enormously establishing trust.

I don’t see why anyone who is not holding significant amount of OWL would vote for a reimbursement of OWL, there is no upside for GnosisDAO.

Honestly - that is a fucked up view. You (Gnosis) need to reward those that trust in Gnosis. People can right now sell their OWL at ~$1. If they not do that - they do that only for the reason because they believe it will also in the future be worth $1 (or even more) - aka. they trust Gnosis. If Gnosis does not do anything new/additional with OWL it will be just another Magnolia going forward.

That is a fair point and of course absolutely necessary. On the other hand - Yearn and others currently pay >10%, so I would really be fairly easy to get this going and start establishing this new narrative:

  1. Print 10m OWL
  2. Create demand for OWL with a yield farming program for e.g. OWL denominated prediction market or OWL/token AMMs/ CMMs on Gnosis Protocol
  3. Sell them for 1:1 for stable coin
  4. put all stable coin into year.finance

As a meta point: GNO price/ value is totally fucked up right now - not even worth the assets Gnosis holds. Compare that to so many other project that have very little assets, products with very limited number of users but still valuations many times bigger than Gnosis. And I think I number people are currently simply looking for is TVL:

And even completely random projects I have never heard of managed to score higher in this ranking than Gnosis. Gnosis is less TVL than it holds assets itself which is kind of crazy to me. With a proper OWL incentive program you could easily get a TVL of $100m+ and at the same time boost prediction market and Gnosis Protocol.

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I agree with this, but I purposefully played this role because I can imagine that GNO token holders without OWL will be more sceptical, so the narrative here needs to be explained.

I think the zero-coupon bond is quite an exciting idea, but there are a few things I would be concerned about:

  1. Yields collapsing in a bear market, and the DAO farming activities not providing enough returns for the OWL buyers to redeem at face value upon maturity

  2. The market views Gnosis with confusion due to having many products + an unclear (until recently) use-case for GNO

Quoting you here:

Why don’t we focus on GNO?

Having an unclear use-case for GNO is clearly what brought some negative press and community views on Gnosis.

I would be in favor of deprecating OWL, and have it redeemable for GNO from the DAO treasury. Less products = more clarity for the community and for investors. This could already be quite powerful in itself.

Regarding GNO not trading at book value, I think the market is still trading based on narrative rather than on fundamentals.

Take YFI as an example. They recently decided to print 22.2% of the supply (vote started Jan 28, got passed on February 2), and on top, one of their vaults got attacked and lost $11M USD on February 5th.

If you believe in any form of fundamentals, diluting the supply + a hack would clearly make the price dump, right? Now lets see what happened:

Price stayed flat after the 22.2% supply increase and after an $11M hack, and a few days later it raised by 67%!!!

In my view, this clearly justifies that narrative and the overall external perspective of a protocol(and it’s token)'s future is a lot more powerful at the moment than fundamentals or existing claims for cash (whether it is from a treasury or cash-flows).

The Yearn community clearly valued more funding the project for the future, and thus, the market reacted in a positive way to things that “fundamentally” would cause downward price pressure.

Another example is UNI (up ~345% since the start of 2021). Currently UNI holders can’t get any claims to cash by holding the tokens, and it is a market-wide opinion that smaller UNI holders don’t have a proper say in governance. Nonetheless, because of a successful product and a compelling narrative that the team will continue to deliver, UNI has performed very well YTD.

The market is full of other examples, as the ones you (@OWL_Fan) quoted with the DeFi pulse screenshot.

To conclude, I think GnosisDAO should focus on the current suite of products that are showing promising product market fit + GNO, our original token, in order to have a more compelling narrative for the whole community.

I would vote NO on this proposal and invite all of you to do the same.

Disclaimer: I do not allow any third party to quote this post with the intention to make defamatory claims against the GnosisDAO, Gnosis LTD, or any Gnosis employees and/or directors. Defamation is based on my own criteria. The intention of this post is to create an active discussion for proposals that have a positive impact on the GnosisDAO. Additionally this is not to be considered in any way financial advise.

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