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.
It sounds like this endowment proposal attempts to simultaneously meet 2 separate goals:
Reduce market downside risk of an “eth heavy” portfolio
Make a return on treasury funds
It’s clear why ENS would want to reduce market downside risk on its substantial eth exposure, but it’s not so clear why “making a return” is so important at this time.
Any investment that “makes a return” will incur more risk than a similar investment which doesn’t “make a return”.
I believe the risks associated with defi are generally understated, and would not be trivial for an actively managed endowment fund.
ENS financials are strong and revenue continues to grow. Trying to make additional financial returns seems greedy.
Additionally, ENS is special because it’s one of the few “non-financial” web3 applications out there, and has historically stayed far away from the “financially engineered speculative gambling” use-cases inherent to most defi products. I’m worried that dipping a toe into the world of defi may sacrifice this well-earned moral high ground. Could ENS ask a future endowment manager to ensure that the requested 4%+ gains aren’t coming from the profits of speculation-fueled destructive behavior? Does the source of the returns matter at all?
Just had a passing thought about this. Maybe a 1% (or some small percentage) creator royalties going to an endowment account would be enough for this type of thing?
This is such an awesome concept and it seems to have really broad support.
It would clearly take a while to execute from a process perspective, but has it been picked up yet by one of the working groups for preliminary investigation?
I’m not morally opposed to putting a royalty on secondary sales, but I don’t see any reason an endowment for core development should be funded exclusively from it.
This risk profile is quite like that of a traditional pension fund and the way this is achieved in TradFi is by buying downside protection in the form of put options. Unlike selling lots of ETH for stable coins to guarantee a long runway and thereby foregoing the potential ETH upside, this one-sided hedging protects the dollar value of the endowment without giving up on the upside. The option premiums could be cross-financed by selling upside calls – effectively guaranteeing the dollar value of funds stays within certain bounds – but this is not necessary.
My co-founder and I are building a protocol (greyswan.finance) which brings options on-chain with the kind of liquidity needed by DAOs like ENS. I had originally posted this thread:
but was asked to contribute here. We would be curious to hear what the community thinks about this idea?
The human element to the treasury funds management by fund managers, in my opinion Nick, limits the functionality of the ENS DAO and if sequence risk is your largest concern, perhaps something along diversification and double cost across the asset classes would promote the longevity, reduce human element, and preserve the treasury wealthstock.
Unless the capacity, tolerance, required risk voted by members would bring a capital management and consultancy onboard the Foundation, or the forward-looking scenarios are financially stressing the capital base, I can’t see why the treasury needs this.
Hi all, I’m Mona El Isa, the cofounder of Enzyme and the CEO and founder of Avantgarde Finance. We are hugely supportive of the creation of an ENS endowment and think it could set an important precedent for how crypto-native public goods are funded and maintained. ENS is in the enviable position of earning revenue in ETH and not being solely dependent on its native token for sustenance. Protecting that competitive advantage should be a high priority and we believe that a thoughtfully designed endowment can help to achieve that.
I’ll also take a moment here to suggest Enzyme as the solution to a few of the concerns raised throughout this thread. In particular, concerns raised around the operationalisation of this strategy. Enzyme was purpose-built as an asset management infrastructure for non-custodial asset management strategies called Vaults. In an Enzyme vault, investors always have access to their funds and can be confident that the vault’s manager will allocate them according to rules enforced at the smart contract level. Out of the box, those rules can limit the exchanges and protocols with which the manager can interact, slippage they can incur, leverage, what addresses can invest, what addresses can hold shares, etc. It’s also possible to write custom policies specific to the scenario; that’s something we’d be happy to help with. In short, the policies can be configured in such a way that the DAO has confidence that the manager will trade according to their mandate, but the manager won’t have to go through a DAO-wide vote on every trade.