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.
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.
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.
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 .
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.
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.
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.
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).
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.
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.
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 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
“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.
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:
.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”
“.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.
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.
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.
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.
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).
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.
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.
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.
I’m not sure what “sustainable development” means. The endowment would be owned by the ENS DAO the same as the funds currently are; it would be managed by a fund manager, preferably onchain.
Most of these assets are in ETH, and we have seen drawdowns of >70% in ETH in bear markets before. TNL’s annual operating budget is on the region of $1.5M, and that’s before accounting for any DAO expenses.
I’ll apologize in advance for over reacting in my original message. Those words were way too harsh.
What I was getting at is that an endowment, from what I understand, would be a separate legal entity and I don’t understand how it will be owned by the DAO or even controlled on-chain by it.
Will it be a board consisting of members from the DAO that are bound by the Endowment to follow an on-chain vote, or how will that actually work?
My principle concern is that this doesn’t end up moving a very large portion of the treasury out to a separate legal entity that’s legally not within the control of the DAO.
My intention was not to suggest establishing a separate entity; just to set aside a portion of the treasury and manage it as an endowment (using an external fund manager, preferably with limited permissions to act onchain). It would likely be in a separate wallet, but still ultimately controlled by the DAO.
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 