I appreciate the elegance of this system, but here are the issues I see with it:
Let’s analogize to a centralized startup business for a minute. Startups often raise money at around 15X revenue in valuation, and often dilute existing share holders by about 25% in a raise. Suppose a startup is generating $2.5M in revenue – $2.5M * 15 * .25 ≈ $9M in funds raised, or a 3.75x ratio between revenue and funds raised. This money is spent in addition to their revenue, so the startup might spend $9M + $2.5M + $5M = $16.5M over the course of two years – the investment capital plus its growing revenue in the two years after the raise. 16.5/(2.5+5) = 2.2x revenue is spent in this period in order to grow the business. Share holders accept the 25% dilution because the value of the business is growing faster than the dilution. This is a very standard approach to capitalizing a startup, where it’s been shown time and time again that when a scalable business has PMF, spending more than revenue and diluting share holders is in everyone’s shared interest.
Of course it’s also possible to bootstrap a business by only funding growth from profit. But that’s a slower process and tends not to be competitive when you look at scalable tech/finance/etc businesses. It can totally work, it’s just slow and doesn’t allow a business to gain marketshare quickly, etc.
The ratio you are proposing is very low from this perspective. You’re saying normal funding would be 33% of revenue (the burned part) * 50% = 16.5% of revenue, as compared to 200% of revenue. So that’s suggesting a 16.5/200 = 8.25% rate of investment compared to industry standard.
I get that the idea is that this could be supplemented by releasing faster as needed. But by applying the ratio of 2 treasury RSR burned per 1 RSR released, that just cuts down the size of the treasury by 2/3. That’s basically saying: you can only do 1/3 as much growth capital injection as a startup would. (We’ve already limited the amount of dilution that RSR holders can ever be subject to by setting a fixed supply, s owe are already taking a more disciplined approach than a startup business would, where it can issue as many shares as it decides to over its lifetime.)
In the short term that might make no difference. Suppose we did this and still chose to release 3B RSR once we are round $2.5M in NARR, while burning 6B RSR at the same time. The numbers would be the same at that point. It’s later in the game that this comes back to bite us. Unless revenue was absolutely through the roof and funded everything (remember that here we are only allowing the ecosystem to spend 16.5% of revenue on operations, not 100% like a bootstrapping business would), we would have to rely heavily on this burn-2-to-unlock-1 approach for most of the project funding, and that would run out 3x as soon as with our current treasury supply.
Another way to look at it is to ask: how much NARR would we need to reach in order to generate 3B RSR in unlocks without needing to burn any treasury RSR and shorten overall project runway? If we unlock about 16.5% of revenue, and we assume the 3B is to cover a ≈2 year period then we can calculate 3B * 2 (since we need 2X the burn as unlocks) * 3 (since we burn ≈1/3 of revenue) = 18B RSR over two years, or 9B per year. In USD terms at an RSR price of $0.005 or $0.015 that’s about $45M to $135M in overall ecosystem revenue per year. So we’re saying: if we are going to do this without any shortening of treasury runway later on, then instead of needing to hit $2.5M in NARR, we need to hit $45-135M in ARR on the same timeframe. That’s just not realistically going to happen, so we we’d essentially know going into this that we’d need to mainly unlock via the second mechanism of burning treasury RSR.
As a result, this proposal pretty much amounts to:
- burn nearly 2/3 of the locked supply
- unlock RSR as needed, but run out faster since we only have about 33% of the effective treasury size
- hope that this is enough runway to reach full success
I understand the desire to reduce supply overhangs and overall supply in order to increase value per token!
But what I feel others in the community underappreciate is the value of the future project runway, to continue injecting growth capital in the scenario where things are working well.
I totally acknowledge that, so far, the project has failed to find meaningful product-market fit and generate meaningful revenue (especially when accounting for costs, hence the net revenue concept I am so focused on).
That’s why I’ve proposed that we only unlock additional tokens if we hit an exciting $2.5M in annual revenue (after incentive costs so that this is not gamable) – this way, if things don’t go well with PMF, we don’t dilute supply, unless token holders collectively decide to for some reason.
@Ranger – with this explanation in mind, I’m curious to hear your take on these questions:
- Do you think shortening project RSR treasury runway by 2/3 is the right thing to do? If so, why? Why don’t you think it would be a good idea to have that RSR available for later stage growth if the project is doing well?
- Do you think it’s a good idea to only spend ≈16.5% of revenue on project operations and growth? If so, why? Do you agree that a bootstrapping business spends 100% of its revenue on operations (no distributions to shareholders early on) and a growth startup spends more like 200% (with dilution)? What makes you think we could operate so much more frugally?
- Am I missing something about your proposal? Do you see a problem with my arithmetic? I know I’m making some assumptions and simplifying a bit, but is it not by and large correct?
By the way I like your comparison table a lot, and I think this proposal has some nice qualities.
- I like how simple and elegant it is
- I like that it’s a cool narrative that people would be excited about, and I can imagine that it might increase willingness to buy and hold RSR, so it could increase short term USD price per token, which obviously is a helpful thing for everyone and for the project
On the point of it potentially increasing RSR price per token, I guess we have to ask: would it reliably increase price per token by more than 3X for all time? If we looked into a crystal ball and saw that it definitely would, then this would be a good deal for token holders and the project overall. But that seems like a very generous and optimistic assumption to make, no?
This highlights the different incentives a token holder might have from the project itself. A normal holder who is just hoping to sell their tokens within the next year for as much as possible would be happy with this deal if it leads to a 1.5X value increase only in the short term, even if it leads the project to be much smaller and less successful in the end, since they plan to be gone anyway. A long-term holder who plans to be part of the project for the next 10+ years cares more about about the sustainability and long-term trajectory and prospects to become something very big and meaningful in the world. I’m not trying to accuse anyone of being one or the other, I don’t know what each person intends here, just pointing out how different goals will lead to different ideas of what’s best.
