It would be useful to have a way for interested holders of existing assets to invest in the long-term future of Namada, in a way which gives the network itself capital that it can use to build out infrastructure for users (e.g. more and better wallets, more and better shielded actions, etc. – many of the possible roadmap items are ultimately infrastructure which supports a useful product and a great experience for users). One idea I had would be for Namada to issue shielded bonds (think: bond market, not proof-of-stake), where:
The network could periodically sell bonds (e.g. in an auction) for selected non-native assets,
Non-native assets collected would be kept in a “foreign reserve”, which could be used for various purposes.
Bonds would be tokenized and transferable within the MASP, but not transferable outside Namada.
After a fixed period (e.g. 1 year, there could be multiple bond types with different periods), bonds would be redeemable for the face value of NAM.
This kind of mechanism has a few potentially compelling affordances:
Non-native capital in the foreign reserves could be used to invest in the short term (e.g. in salaries for app developers, where the app developers want to be paid in USDC) in activities which will bring value to Namada in the long term (e.g. the app they develop).
Some foreign reserves could also simply be kept as a buffer to give Namada a more stable economic outlook (which can be hard to find in crypto). Predictability is very helpful for planning.
The bonds themselves would not generally be tradeable, since they cannot be transferred outside of Namada and Namada itself does not support any trading functionality. The bonds would be transferable in the MASP, so users could technically swap OTC, but I think we could expect trading activity to be minimal, and no public market to develop. This makes such bonds a good candidate for PGF mechanisms which benefit from having an “illiquid version” of an asset, such as – potentially – the Donor Drop.
A likely potential concern: don’t bonds just dilute network stakeholders in the future? Indeed they do, but the immediate benefits may well be worth it if we invest the foreign reserves wisely, since doing so would make the network itself more valuable in the future.
Credit to @Gavin – we brainstormed this idea together on a call. Thoughts?
TL;DR Namada could borrow USDC to pay for goods and services. After a year, Namada returns the same value in NAM. This way the protocol does not need to swap NAM for USDC immediately.
The incentive for bond investors may be a discount or interest set after an auction. For instance, they might bid 92,000 USDC to get 100,000 NAM after a year, assuming 1 USDC = 1 NAM at issuance. If NAM went up in price, this would be a bad deal for the protocol.
Another option is to determine the exchange rate at maturity. For example, investors might bid 91,000 USDC to get 98,000 USDC worth of NAM one year later. If NAM went down in price, this would be a bad deal for the protocol.
It is also possible to offer no discount or interest. The incentive for investors would come from taking the other side of the bet on which way the NAM price goes.
That’s a great TL; DR! My only little note would be that whether this is a good deal for the protocol (network) or not depends not only on market price changes but also (and perhaps more importantly) on what the capital is used for, and what benefits this brings to the network.
I feel like in previous discussions there has been a healthy focus on long-term sustainability with regards to discussions on lock periods, vesting and such. In a way I feel this is simply introducing a mechanism akin to token locks/unlocks via the backdoor so to speak. The effect will be to get short term cash into the project (which can be good for operational purposes of course), but it creates a bill that needs to be paid (from the perspective of the protocol) at the expiry of the bond, thus effectively trading future obligations for short term capital infusions. I would like to hear more about why this is necessary. I envision a scenario where we will check for bond expirys like one checks for token unlocks in other networks. Just my first impressions, would love to be clarified on some of these points! (if there is an idea that it’s better to spend foreign assets instead of liquidating nam for operational purposes short term, I am not sure that’s sustainable, probably better to do the swaps up front in my opin, same logic as in the discussion on vesting/unlocks)
To be clear, I’m not arguing that this is necessary, I’m just presenting an idea so that we can discuss it. Like any cryptoeconomic choice, what makes most sense depends on what Namada as a network and community wants to do – this is just a potential mechanism, with potential pros and cons.
I can see that these do look similar from a certain perspective – in both cases, there are future token “unlocks”. However, I think the economics of shielded bonds are pretty different from just “vesting tokens at launch”, for two reasons:
Namada would get a predictable amount of non-native capital which could be immediately invested in productive activities. Token “vesting” provides no such mechanism.
The parties purchasing bonds have consciously chosen to do so, indicating that they want long-term exposure to Namada, and (perhaps) that they plan to support the project in some capacity to help make their bonds valuable. Token “vesting” where parties do not explicitly opt in (as was the case with Namada – Namada genesis tokens were never sold to anyone) provides no such signal.
Yes, that’s right, with future obligations in NAM and short-term capital in non-native assets. Bonds are a pretty common mechanism in the “real world” for doing exactly what I’m proposing here: raising capital usable in the here-and-now in exchange for liabilities in the future, in an attempt to use the capital to build something. Whether or not they make sense seems to me to depend on the terms, what the capital is used for, what the relevant economy (in this case, Namada’s economy) looks like, etc. – such a trade of future liabilities for present useful capital may or not make sense in any particular case, but I think it would be unwise to prematurely rule out the mechanism.
Where funding in non-NAM assets is required, doing swaps up front is indeed also an option. However, I think swapping NAM at the present has some disadvantages which this scheme does not:
The network will inevitably be front-run and get a poor price, because the decision to swap would be made in public before the swap actually happens. There’s no way to avoid this without a very different governance system. Even distributing NAM to other parties who would then sell it to meet USD liabilities has this problem, although it doesn’t matter as much if the volume is low and distributed over time.
The other side of the trade may be short-term speculators or just whoever happens to show up on the markets – the network has no control over who the counterparties to its trades are. From Namada’s perspective, I think it would generally be better to have counterparties who have demonstrated some desire for long-term alignment (e.g. by purchasing long-term bonds).
Note: the potential of being front-run could be alleviated somewhat if Namada swaps a little bit of NAM for other assets very slowly. This is more complex to implement – and large commitments up front still create problems – but could be another direction worth investigating.
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