An ENS enDAOment

I’ve been thinking a lot lately about how we can ensure the long-term sustainability of ENS, and I’d like to outline a possible proposal, which is this: the DAO should set aside a substantial proportion of the treasury, and of incoming revenue (perhaps 50% of each) towards building an endowment that can sustain ENS development indefinitely. These funds should be invested with a mind to the long-term, while minimising the risk of substantial short-term losses.

Ideally, the funds should be managed onchain via an approval mechanism, which allows the fund manager to make trades with approved DEXes, routes, and assets, without giving them direct control over the funds, but I appreciate that this may be impractical at least at first, as well as limiting the options available to a fund manager.

If we assume a desired annual operating budget of $2M USD, and a conservative drawdown rate of 4% of the endowment each year, we would need an endowment of $50M USD.

Today, ENS’s accounts stand as follows:

  • ETH assets: 14,373 ($48,379,000)
  • USDC (after pending proposals): $8,618,000
  • Total assets: $56,997,000
  • Unearned Income (ETH): -8,554 ($28,792,000)
  • Net assets: $28,205,000

Additionally, extrapolating from the past 3 months, revenue is approximately $3.7M/mo and income is approximately $1.9M/mo.

Given that the principle in an endowment is not touched, I believe it’d be legitimate to use unearned income as a component of it, though doing so would require either retaining exposure to ETH or changing how we account for unearned income. Presently it’s accounted for in ETH, meaning that if it were invested in an asset which went down relative to ETH, the DAO could end up with more liabilities than assets.

If the endowment were built from 100% of unearned income and 50% of remaining assets, and funded from 50% of revenue, it’d start at approx. $42.9M and reach the target amount after only 2 months.

If it were built from 50% of net assets and funded from 50% of income, it’d start at approx. $14.1M and take approx 19 months to reach the target amount.

Once the endowment reached its target level, the DAO could redirect income to efforts not covered by the endowment (such as broader grants), continue to grow the endowment to support a larger long-term operating budget, or a combination of both.

All of these numbers are purely illustrative, to give an idea of the scale of the proposal. I believe the basic idea, of doing what we can to guarantee ENS’s long-term viability independent of market conditions, is a worthwhile one, however.

Thoughts?

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Syndicate does this; not at all impractical. You can create an “investment club” DAO and usually one drops N number of tokens (say, 1,000,000 tokens) redeemable for, say, $1 in stake per token ($1,000,000 total). Currently, Syndicate ‘DAO Maker’ offers the possibility to stake ETH and USDC but I’d imagine that it wouldn’t be hard to fork the contract to work for ENS and initiate a 1:1 token bridge. Once the tokens are bridged, the delegates can vote directly with their 1:1 bridged tokens and sign multi-sig investment transactions by voting (multi-sig ↔ vote). Of course, this is not currently implemented by Syndicate at the moment. They only allow basic investment DAO creations and lack customisability. But if ENS DAO really wants, such a dev project can be funded for a small amount. I have an investment club on Syndicate that I created for testing but I cannot share the link for legal reasons (don’t want people to buy the tokens since they represent capital stake in my startup) but here is the contract. You should give it a shot while the fees are low. Or perhaps invite Syndicate for a round of talks?
This is to simply illustrate the possibilities on the smart-contract side of the endowment once you have the amount ready to be enDAOed.

I probably did not get this right. $50M at estimated 4% worst-case downrate will deplete at most by less than $2M (highest in the very first year); is this how the annual operating budget fits in this calculation? In other words, annual drawdown in any year should not exceed the annual budget which is ~ $2M?

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I think an endowment is a great idea to ensure ENS’s long term viability. If we are going to go down this road, then we should retain an endowment expert to develop a plan.

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Thanks for the writeup Nick! This idea has grown on me since @alisha.eth briefly brought the general idea to my attention a bit ago. The most convincing argument to me is the very real/likely possibility that CCIP-read and L2 resolvers will ultimately cause a massive reduction in premium domain revenue down the line, which represents the grand majority of ENS revenue today.

Here are my quick thoughts:

  • I would actually go further than your target, in terms of the principal, @nick.eth. I’d say if we do this, we should aim for at least 80% of treasury + revenue into the endowment fund, maybe more. We should treat the withdrawal limit as the annual budget (as you’ve spec’d out here already). I would say if we go with this strategy, we’d need a good reason to justify why we wouldn’t put all of it into the endowment in determining the % not contributed to the fund from initial treasury + revenue, rather than the other way around :smile:
  • Treating an endowment withdrawal percentage as the main faucet for a budget can make budgeting and grants discussions much easier, since the amount available is much more predictable than direct revenue to treasury. That would be a positive in this DAO I think.

I would say properly locking down the funds is a bare minimum requirement, actually. There’s no reason we can’t do this today. We don’t even need to make it as onerous as “every transaction is approved by the whole DAO.” We can setup a Gnosis with one or more of @keikreutler.eth 's fancy Zodiac modules to lock down (whitelist) what can be done with the funds, so they can only be used to stake/unstake/etc. in pre-approved operations by whatever fund management committee, for example. Importantly, I think it needs to basically be impossible for managers to steal funds.

Even if we chose people we all trust, I’ve seen too many super competent crypto operators have private key compromises at this point. ENS DAO has already done a great job of properly implementing smart contract autonomy in DAO formation, let’s not stop now :smiley:

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The wisdom in traditional fiance circles is that you can draw down on 4% of an an investment each year without reducing the principle over the long term, because returns will on average exceed 4%.

I understand the argument - but I want the DAO to still be able to serve its secondary purpose of funding public goods.

True, but unless we’re putting 100% of income into the endowment, there will still be a variable component. It may be easier to allocate this knowing that basic needs are met from the endowment, though.

Agreed - I wrote a basic version of this for exchanging ETH to USDC for the multisig, too. It has drawbacks; it limits investment opportunities to those that can be done onchain, and would likely require a DAO-wide vote to add new transaction types to the allowlist.

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Back of the hand calculations confirm traditional fiance circles’ wisdom. Smart fiances you got there. Wen DeFi(ance)? :grin:

I like the idea although I am not well versed with the nits and grits of endowments. Looking forward to hearing more.

I feel like the challenge here is putting someone in charge of the endowment, while the community is able to act as a check and balance without it being overly burdensome. At Orca, we’re currently launching a concept called optimistic pods with Tribe which may make sense. [FIP-82: Governance Enhancements - Tribe] Basically for their critical processes (contract changes etc.) they are using what we’re calling optimistic pods. Basically a pod with a timelock. In this case the Endowment pod would have a timelock which is vetoable be an $ENS vote, and potentially one or more Pods. The idea is it provides maximum flexibility while maintaining strict oversight.

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I’ve been convinced of the idea since I’ve heard Alisha bring it up. I was working with the assumption that our budget should be 50% of last year’s revenue, but there’s a real chance that last year was an outlier and we should instead consider the endowment instead.

  1. What are you considering “unearned income”? I suppose that’s the eth gained for future renewals? If that’s the case, then I don’t see why not put it directly on the endowment. That ether should be considered an advancement on future income, and since the “service” provided (keeping ownership of the name) is automatic, then it makes sense to invest that in the endowment .

  2. Why are you not considering ENS token treasury? In theory the ENS DAO will eventually receive half of all the ENS tokens, which could be almost a billion dollars. While that money is not yet vested, and we couldn’t really sell that, we should device an strategy for these funds that would earn income. I would suggest putting all ENS tokens in some liquidity pool (Balancer has a Boosted pool feature in which the stable tokens side is automatically invested in interest generating Aave tokens). So available funds would not be sold on the market, instead they would provide liquidity for the market and a passive income for the DAO.

  3. Instead of considering a constant 4% drawdown, I would be more pragmatic and just use a fixed percentage of last year’s interest. So if last year we earned $4M on passive income, then we should reinvest $2M on the DAO and use $2M as operational budget.

  4. The counter argument for the endownment is that we have by no means guaranteed our success as the top name register system. Even if we are technically superior (and I consider ourselves to be), there’s always a chance that a less technical competitor can outspend on marketing (including SEO, hackathon grants, social media, etc) or that ethereum fee makes another L1 the first choice for most users. I am a believer that spending marketing on a before true market fit can skew success metrics and doom a project, but that doesn’t mean we shouldn’t have a good warchest intended to be entirely spent in the next 2-3 years with the expectation that this will boost the project long term. After all, for the next 5 years what scenario we prefer: that we have a 10-100x our treasury by mainstreaming decentralized domains, or that we have a forever budget of $2M to spend on a project that faded into obscurity? But then, maybe that’s what the tokens are for.

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This is what keeps me up at night. Betamax was first and better, but VHS won with better marketing and cementing industry relationships. It didn’t matter how much the core Betamax fans bleated about higher quality, the consumers did not mind or even know that they were making sacrifices (and it was cheaper!). UD is definitely cheaper (especially when you factor in all the gas you spend updating records after the fact on ENS), and the consumer doesn’t even know or care what sacrifices they are making (having a name just sit in UD’s centralized database and not actually being secured by the Ethereum network). Plus they have a powerful and compelling “no renewals” narrative tool.

ENS is by far the best solution, with some of the best developers in the business. But we definitely need to improve on marketing, outreach, SEO, and all that. I think we are doing better on cementing industry relationships, as it seems like ENS integrations outnumber UD/SNS (or maybe I’m just in a bubble).

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As much as I like the “enDAOment” pun, I’m a bit skeptical that the target returns are actually achievable in a crypto-only portfolio. From what I’ve seen, crypto is too new and too volatile to allow for any objective investment framework that provides safe, consistent, conservative, and reliable year-over-year returns (see my thoughts on stablecoin yield farming). Crypto investing is like venture capital: most investments in a fund will lose everything, but a couple will give 500x returns. Given these dynamics, it’s almost impossibe to target a consistent 4% yield, and I think the crypto market is ill-suited for endowment-like funds (although I’m open to hearing counter-arguments).

Additionally, moving the treasury into an actively invested fund also puts ENS into an almost “no-win” scenario:

  • If the fund underperforms eth, we should’ve just kept it in eth
  • If the fund outperforms eth, maybe we’re taking on too much risk

The fund manager, stewards, and DAO will open itself to endless criticism unless this fund operates in the very narrow band where it outperforms eth, but only a little, and still enough to cover DAO expenses. That’s a pretty hard target to hit.

The 4% number is based on 50+ years of historical market trends for a well-diversified portfolio. There’s no evidence that this number also applies to crypto.

While this is certainly possible, it’s equally likely that domain revenue increases into the future with greater ENS adoption. As long as ENS keeps a close eye on revenue trends, we can always change investment strategy if business conditions change. For now, I don’t think CCIP/L2 is an urgent threat to the ENS revenue model.

I believe the basic idea, of doing what we can to guarantee ENS’s long-term viability independent of market conditions, is a worthwhile one, however.

I agree, but I think long-term viability can be achieved with 2 simple rules:

  • Strict and conservative limits on yearly treasury withdrawals (say, 5% per year)
  • Hedge against market-downside risk with stablecoins (ie: always maintain 5 years of runway in stables)

Even if ENS doesn’t receive another wei, this strategy could keep ENS operational for decades, while forgoing the immense complexity required to securely administer an active endowment fund.

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You bring up a lot of great points! On this one, I would push back, though. I will go further and say that it’s highly unlikely “.eth” names will be as valuable as they are now in the not-to-distant future. Right now, on-chain (non-DNS) ENS names are being considered a scarce resource, because subdomains are less practical to use because of L1 gas costs. About 60-70% of registration revenue monthly currently comes from premium domains.

CCIP-read opens the door to subdomains becoming first-class citizens in the ENS namespace, which makes ENS names a non-scarce resource (remember, subdomains are just as much ENS names as “.eth” or DNS names, and they can be made to be just as permission-less and censorship resistant). This is why I keep telling my friends speculating on “.eth” names is a bad idea long-term: They aren’t meant to be scarce, that’s effectively an accidental byproduct, and just like companies now buy gTLDs instead of shelling out for “.com” today, so too will people start using subdomains for products/communities they are part of than worrying about owning their “.eth” name.

(edit) And to clarify, if most users in the future end up being onboarded into the ENS ecosystem via subdomains, we don’t see any revenue from that. So you can get 1B+ people to use ENS without any of them actually paying for an ENS name, if the vision of CCIP-read based resolvers comes to full fruition.

I would definitely strongly consider the very real (and imo, likely) possibility that our current revenue rate will drastically drop in the not-to-distant future.

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Whether ENS will maintain/increase its revenue, or rather how it will maintain/increase its revenue, is a subject which requires another broader discussion on its own (in the Meta-Governance WG). I am of the belief that both of you are right to some extent since the points put forth are legitimate on either side. Having said that, there are still only about ~ 1M .eth names while the total number of .com domains stands at ~ 200M, which makes up for about 52% of the total domains (~ 380M); so the .com vs .rest ‘sub-to-main’ ratio is 1:1, where .rest = .[in, ru, org, net, uk, au, de] etc.

If some comparison was to be made with web2 (domain.eth ↔ domain.com & sub.domain.eth ↔ domain.rest), then .eth is currently far behind .com. Firstly, we are a factor of 200 away from .com volume and the sub-to-main ratio is probably almost 0. So, there is a lot of web2 volume that is yet to be captured by web3 and therefore I imagine that there is still quite a lot of time until we hit the ceiling. In this sense, I am inclined to agree with @royalfork that it is not a threat in the short-term. Plus, the total number of .eth dWebsites is only about 2500. So, it is not fair to even make a comparison of domain.eth ↔ domain.com because the true qualitative comparison is domain.eth ↔ [domain.com, $$$, code], which is unprecedented.

In addition, I have generally found that reading too far into the future in crypto space is probably not a wise move. The space is so young that things often don’t turn out as one expects since the number of possibilities starting at any time is immensely large (as well as the ways to leverage those possibilities is large). The system is dynamically evolving due to so many degrees of freedoms while web2 was largely copy-paste templates. We have no idea what next good thing (or bad thing) may happen to ENS in terms of a novel use-case or simply just web3 taking off. The best thing one can do is maintain a safe horizon and keep track of the trends and such. That is the only way to evolve in web3.

Seems like @carlosdp is all-eggs-in-one-basket type of person :wink: I don’t think we should commit to 80-100% revenues toward endowment out of fear of going out of business. I’d like some eggs outside :stuck_out_tongue:

“Nothing is certain. Even the wisest cannot see all ends.” - Gandalf

Addendum: I will personally think that we are near the ceiling when the .eth ecosystem starts gentrifying uncontrollably around socio-political axes. We are nowhere near that. We haven’t penetrated even the skin of society.

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We should probably get back to talking about the proposal itself, but I do think the revenue bit is important as it’s what convinced me this is something worth pursuing sooner than later.

I would caution against making a comparison to ".com"s scale and ".eth"s future, for a few reasons:

  1. .com had over a decade to become the de-facto “legit website” TLD before ICANN opened up gTLDs, and only recently have consumers begun being trained that websites can be more than “.com” and “.org”
  2. “.eth” is starting out in today’s world, where gTLDs are gaining prominence out of necessity, I don’t think we can expect the same staying power “.com” had, the conditions are just not the same.
  3. The very fact “.eth” requires L1 gas costs to register, while subdomains (either on L2 or off-chain) will either be super cheap, or likely free, tells me pretty firmly that they will represent the grand majority of the ENS namespace, ultimately.
  4. There’s no technical reason these subdomains can’t be implemented today. CCIP-read support is already in the latest ethers, for example. So it’s just a matter of time and resources for the first large group to implement it. Given that, I don’t see a reason this transition wouldn’t start sometime later this year.

My suggestion for 100% of revenue isn’t for fear of “going out of business” (important to remember this is a public good, not a business hehe), but rather because in my experience with endowments (I helped form a small one at a very prominent US university a while ago) it’s generally a good way to control a budget. It also makes it easier for other organizations to donate to such an endowment in the future, should that be necessary one day!

I think this is a good point that needs to be talked about too, if we’re talking about longer-term planning. The treasury is technically much larger than what we’re talking about here, if we look forward.

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While EIP10/CCIP will likely contribute to significant growth of subdomain registrations, I’m not convinced this growth will have an outsize downward effect on revenue from 2nd-level “.eth” registrations. Subdomains are already a first-class citizen in the ENS ecosystem, and are already cheaper than “.eth” registrations, but 2nd-level “.eth” registrations are still increasing consistently. If anything, I’d think a large boom in subdomains will only contribute to more 2nd-level registrations.

Backing up, is this endowment supposed to take risk off the table, by diversifying eth into a safer portfolio, insulating ENS from market conditions? Or are we trying to increase our risk tolerance in exchange for passive income, for fear that our main revenue stream will dry up? To me, these ends are mutually exclusive: you can’t simultaneously increase and decrease your risk appetite. I think it’s premature to discuss adding risk until we start seeing significant downward trends in revenue, and if we want less risk, it’s simple enough to just hedge with stables.

I agree that endowments are fantastic investment vehicles for Universities and other traditional non-profits, but I don’t think this experience carries over into the crypto world. Particularly, the homogeneity of investment types (all high risk), and lack of fiduciary duty of administrators, make a “crypto endowment” tough to practically implement, in my opinion.

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Correct me if I’m wrong, @nick.eth, but I believe the main purpose is to develop a fund that has a restricted withdrawal limit in order to “ensure the long-term sustainability of ENS.” As in, a fund that we can’t spend all at once so there’s some measure of “we know we’ll have X amount of ETH available for next year’s budget, no matter what.” Getting a return on it is just a smart thing to do potentially, but not the primary goal (we can do that without an endowment fund).

That’s entirely possible! I’m not an expert in finance or DeFi, but wouldn’t stablecoin lending, for example, be relatively low-risk (for crypto world, anyways)?

So again, just want to make sure people get the picture of what effect CCIP-read/wildcards can have here.

Subdomains, before CCIP-read, still require L1 gas to register. After CCIP-read, they can be L2 gas cost, or entirely free. I would not base the behavior of subdomain registrations post CCIP-read on those pre CCIP-read, it’s an entirely different world we’re heading into (slowly or quickly, who knows).

For example, today, Twitter could grant every single Twitter user a valid <user>.twitter.com ENS name for basically 0 gas cost (the only gas cost involved would be registering twitter.com itself).

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This is an interesting idea, but enforcing a multi-day delay on all operations would make things like swaps using DEXes nearly impossible, or subject to substantial slippage.

I think this is something submissions could offer solutions on, though - part of the submission would specify how they plan to ensure the safety of the funds.

That’s right. I agree it makes sense to make it part of the endowment; the main challenge is that at the moment we account for unearned income in ETH, meaning that if the funds do not retain ETH exposure, variation in the ETH price would affect the size of our obligation (for example, say we convert 1000 ETH to USD at $3000 each, then the ETH price doubles; our unearned income is still 1000 ETH, but we now only have half as much money to cover it). One solution to this is to allow unearned income to be part of the endowment but require it retain ETH exposure. Another is to change our accounting basis for unearned income to be in USD. A third is to simply accept that this figure may go up as well as down as prices fluctuate.

I’m open to considering that. I don’t think the DAO should be selling ENS tokens except in dire need, but there could be other uses to put it to. LPing is an option, though it typically requires us to have liquidity for the other side of the market, and means that the DAO is effectively buying more tokens as the price goes down.

I suppose we could stake them all on AAVE, which would be a pretty effective way of keeping the yields there low!

Part of the point of an endowment is to provide a steady but sustainable operating budget. If we condition it on last year’s income, we could see large fluctuations year-on-year.

I definitely don’t think we should put everything into an endowment, or grow it indefinitely. We should have a target (which can adjust over time), and set aside funds for uses other than growing the endowment even before we hit that target.

Given the endowment’s goal would be to provide a stable source of funds for ongoing operations, I think it would need to be measured in something like inflation-adjusted USD, and aim to make a steady return on that while minimising risk.

If a fund manager can’t make 4% PA via Crypto, they could take the money and invest it in a traditional market. 4% should be a lower-bound.

The long-term goal would be for the endowment to make modest returns such that it can fund ENS operations indefinitely without drawing down on the principle of the fund, and without relying on external income. This is a risk-reducing proposition, not a yield-enhancing one.

What obligation? If someone pays $100 to have a name registered for 20 years, then the renewal will be automatic. We don’t owe $5/year to any party.

I would argue that the endownment must be visible on chain. We can set up a manager to admin and have some rights but I would be quite uneasy about any manager that would propose selling it for cash, investing in a bank and promising to provide a 4% return in a year. I don’t feel comfortable right now with the idea of the Cayman Foundation actually holding cash in a physical bank.

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By “obligation” I mean simply the amount of unearned revenue.

Even though the service is provided automatically, unearned income is a valuable metric for managing our income. If we have 100k names renewed one year at a time, or 100k names renewed 10 years at a time, we should be budgeting the same, but operating purely on revenue, we would have 1 very good year followed by 9 bad years. Unearned income allows us to treat operating revenue more sustainably.

I agree, it should be done onchain if at all possible. The point I was making was that tradfi revenues should be a lower bound for investment income while minimising risk. If we’re not prepared to take funds offchain, someone else will arbitrage that opportunity - borrowing funds onchain to invest them offchain.

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I’m sorry, what?

That is not what an endowment is or how it works. The point of an endowment is to ensure the sustainable future funding of something from investment returns alone - eg, to make ENS secure against future downturns in registration revenue.

Which can and should be accomplished by the DAO for all of the treasury through sustainable development rather than reserving 50% of it for investment under what I presume will be another legal entity?

At nearly $57mil assets I don’t think we’re at such a risk of suffering a downturn that development would suffer. Assuming an annual cost of $500k for development with no registration or renewal income at all we’d have development costs covering 114 years.