SWIP-05: The Polygon Proposal, Balance Sheet Clean-Up, and Liquidity Optimization Plan

SWIP-05 Mainnet Vote: Snapshot

SWIP-05 Polygon Vote: Snapshot

Simple Summary

Over the past few weeks, the SW DAO Founding Team has been discussing ways to improve the overall operation and performance of the DAO. We believe that the first way to achieve this is by moving the SWD token dividend solely to the Polygon network, the second way is by placing SW DAO products on the Treasury balance sheet, and the final way is opening a Balancer liquidity pool on Polygon. This proposal outlines our reasoning and justification for these improvements.

Abstract

‌SWIP-05 proposes that all personal Ethereum mainnet SWD tokens be bridged to the Polygon network by March 1st in order to resume collection of the dividend, with personal dividend multipliers uninterrupted upon bridging completion and the 100 SWD token hurdle being removed. SWIP-05 also requests that the SW DAO Treasury converts its assets in the following manner: 41.84% into ETH, 23.26% into SWAP, 23.26% into SWYF, and 11.64% into MATIC. Finally, SWIP-05 requests that a Balancer pool with SWAP, SWYF, ETH, and MATIC be opened for 70% of SWD token liquidity, with additional Uniswap, Sushiswap, and Quickswap pools opened for SWD-ETH backstopping on the additional 30% of SWD token liquidity.

Motivation

First, let’s discuss the dividend.

The dividend is one of the main incentives for governance members to participate in SW DAO and ensure its continued health and growth. The current system of distributing dividends through a smart contract on the Layer 1 Ethereum mainnet has several drawbacks:

  1. It is not very scalable, as the number of transactions required to distribute dividends will increase linearly with each voter. This could lead to congestion on the Ethereum network and slow down the overall distribution speed as well as increase the base Gas price at the time of distribution.
  2. It’s very expensive per transaction, due to the gas fees required to execute smart contracts. This will lead to large expenses for the DAO and will reduce the future funds available for dividend distribution. SWD dividend recipients currently have to cover hefty ETH gas fees out of pocket if they choose to exchange the USDC dividend for our products or to cash it out to a fiat off-ramp.

Due to these drawbacks, we currently require a 100 SWD token hurdle to be met in order to airdrop the dividend. For some community members this $ equivalent is similar to that of many months of rent - thus likely unattainable. This existing hurdle reduces the incentive for smaller token holders to participate in governance and bring forth their personal opinions. As we find value in opinion from both Whale to Shrimp it is important that both community member classifications be rewarded justly.

By requiring the March 1st and beyond dividends be paid out solely on the Polygon network we can remove the 100 SWD token hurdle, and reduce our fee expenses by >90% - saving our users and the DAO money.

Next, let’s discuss adding SW DAO products on the DAO Treasuries balance sheet.

SW DAO currently holds mostly ETH on its Balance Sheet due to Liquidity Provisions, while this exposure is helpful during bull markets it is harmful during bear markets. If we do enter a bear market SW DAO’s purchasing power will effectively decline along with ETH token price putting us in poor positioning during times of need for DAO capital asset liquidation. The diversification of our balance sheet will allow us to be prepared for all broad market conditions from a bull market to a bear market.

In addition, the reliable income generated from SWAP and SWYF provides SW DAO with streams of cash flow regardless of market conditions - a significant change from solely holding ETH and hoping it appreciates. This consistent cash flow will organically compound our DAO treasury holdings as well as contribute to a growing dividend pool - as 50% of all DAO treasury investment gains pass through to governance members.

Finally, let’s discuss opening up a liquidity pool on Balancer.

Our current SWD token liquidity is backed 100% by Ethereum. This means that our token is perfectly correlated to Ethereum price performance when SWD trades are not occurring. This lack of variety in SWD token liquidity could lead to large price swings and potential sell-offs when Ethereum experiences a bear market as we recently experienced. SWD token would currently be trading ~$10 and not ~$8 if we chose a 100% SWD-USDC pairing in SWIP-02.

Opening up a Balancer pool on Polygon would give SWD token holders an alternative variety of assets to sell their tokens into, while simultaneously reducing the overall downside volatility of the token price.

Specification

Overview

The vote will appear as such:

Do you approve of the following changes to SW DAO?

  1. The monthly USDC dividend will be airdropped solely via the Polygon network beginning on March 1st. February 1st will be a hybrid Layer 1/Layer 2 dividend airdrop acting as a grace period for non-bridged token holders. The dividend multiplier will be unaffected by all who bridge to Polygon. The 100 SWD token hurdle will be removed beginning February 1st for all Polygon network SWD holders.

  2. SW DAO Treasury will convert 41.84% of total assets to ETH, 23.26% of total assets to SWAP, 23.26% of total assets to SWYF, and 11.63% of total assets to MATIC.

  3. SWD token liquidity will be distributed 70% in a new Polygon Balancer Pool with SWAP/SWYF/ETH/MATIC, and 30% on Uniswap, Sushiswap, and Quickswap for SWD-ETH pairing.

All three changes outlined above will be approved or denied in a single vote. ‌Governance participants will select one of the following two options:

  1. “Yes”
  2. “No”

As per standard governance operating procedures, 20% of the circulating supply must take part in the voting, and the outcome will be decided based on which of the two options receives more than 50% of the vote.‌

When a 50% majority winner is determined, the DAO Treasury will be allocated accordingly. Liquidity backstopping will also be promptly changed in accordance with such an outcome. And finally, the dividend plan will roll out as determined by the DAO governance community.‌

Rationale

Dividend On Polygon

The proposed move to Polygon Network would have several benefits for the DAO. First, it would simplify the distribution of SWD dividends and significantly reduce fees. Second, it would provide a more efficient way to scale transactions and support the ever-growing demand for SWD.

We believe that moving the dividend solely to Polygon Network would solve all previously mentioned issues mentioned in ‘Motivation’. Polygon is a much more scalable platform than Ethereum, with transaction speeds that are orders of magnitude faster and less expensive. This will allow us to distribute dividends quickly and efficiently to all voters, without congesting the network or incurring high gas costs.

The removal of the 100 SWD token hurdle for dividend participants would increase governance participation and foster a positive experience for community members of all financial wealth levels. As we seek to provide Wall Street grade products to all Main Street investors, the removal of the 100 SWD hurdle would move us in the right direction.

Converting DAO Treasury Assets

The addition of our SWAP and SWYF products to our Treasury Balance Sheet will provide increased cash flow to our bottom line which in turn organically grows our dividend. Our Treasury balance sheet has the potential to compound through the new revenue stream generated by our own investments. This new income stream will be useful in Q2 when the DAO begins onboarding its own expenses.

Diversifying our DAO treasury should decouple SWD price volatility from the broad market to some extent. SWAP and SWYF are two productive assets that seek to reduce investors’ exposure to negative volatility. Effectively they may be a form of “pseudo-stablecoins” during bear markets as they could be unchanged during market downturns, especially SWYF which at maximum has a 25% directional market exposure. Additionally, SWAP historically outperforms in bull markets as well, thus there we lack the concern of not enough upside volatility should the broad market conditions improve.

Opening a Balancer Pool + Keeping Uniswap/SushiSwap/QuickSwap Pools

Opening a Balancer liquidity pool on Polygon would also have several benefits for the DAO. First, it would provide a more optimized way for the DAO to backstop SWD token liquidity. Primarily by limiting the market correlation of SWD price to ETH price when no trades occur on SWD. Second, it would improve the overall stability of the DAO by providing additional funds to support operations. With SWAP and SWYF on the Treasuries balance sheet, our DAO is better positioned to self-pay upcoming expenses in Q2.

SWD token liquidity will be divided 70% into the proposed Balancer pool and 30% to backstop SWD-ETH liquidity on Uniswap, Sushiswap, and Quickswap. The contained Balancer assets would be 33% SWAP, 33% SWYF, 16.5% ETH, and 16.5% MATIC. This broad variety of assets in our Liquidity Provisioning would allow for community members to seamlessly exchange in and out of our existing products with minimal routing required, thus lowering exchange fees.

Copyright

Copyright and related rights waived via CC0.

1 Like

Cross-posted from Discord:

I like everything I see in this proposal. In general, barriers to moving from Ethereum to Polygon are minor. Biggest one being bridge fees, but anyone that’s made it far enough to purchase SWD in the first place is likely capable of dealing with it. I’m personally responsible for many of the folks invested which use smart-contract wallets, and I’m currently helping them make the switch to Polygon. If anyone else is in this boat, send me a DM, and I can help y’all out.

I’m really fond of the treasury allocations, and Balancer pool. If it were up to me, I’d reduce the treasury holdings of ETH to a much lower number, as our products are likely to outperform ETH in most market conditions.

The only thing I disagree with has nothing to do with the vote: I think if our liquidity was SWD/USDC, we’d probably still be sitting around $8. Bear markets always scare people into selling, but the only reason we’re not sitting lower is that nobody wants to sell in this range. $8 is simply too close to the initial price.