ENS Financial Perspective

🗳️ Meta-Governance Treasury Management
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Open letter to ENS community here.

Apologies for being MIA but between family health issues, trying to manage as a MakerDAO delegate(retired August 2022), and working on other important topics (whitepaper on Work-Rewards to be released) my time with DAOs has been limited.

I have been reviewing what I can find on financials for various DAOs and looking at strategies for maximizing not just investment, but return to the DAO.

Some info from the Fyde Endaoment post:

“ENS has a favorable market position by generating income of $24mn to date with a significant treasury. Despite that, ENS has a current annual expense rate of $8mm (based on the latest budget proposal) and a starting asset base (just looking at the endowment) of $40mm in ETH.”

and from Avantgarde

" Current resources include balances of ETH, USDC, and ENS sitting in the Timelock contract (controlled by governance) and ETH sitting in the Registrar Controller (controlled by the Timelock). The ENS is not included in the RFP’s list of investable assets, so we did not consider it in this proposal.

As of 13 Sep, 2022, the available USDC and ETH balances were approximately:

  • 13,887 ETH in earned income
  • 18,977 ETH in unearned income
  • 3,817,067 USDC

Revenues have averaged about 2k ETH per month over the last year, split roughly evenly between earned and unearned income."

Other info in terms of revenues and holdings can be seen here:

and

MarketCap

The above has some different numbers on circulating supply and available MarketCap. I saw numbers as low as $240M and as high at $450M (total diluted cap 1.7B but ofc 60M+ still sits in treasury).

When I run rough numbers here.

yr/yr revenue growth ~1000%
number of registrations (same ~1000% yr/yr)
ETH revenue up about the same 800-1000%
in terms of $$ varies highly with price of ETH but $2-3M/month looks reasonable.

Difficult to estimate but some data.
At least 1/2 of all registrations have 1yr period. This means during any year expect approximately 1/2 of all domains to need to re-register or lose their ENS domain name). If we say perhaps 3:4 of those do re-register we can estimate on-going re-registration revenues. Total registrations ~2M means at current above projected rates (and 2M registered) 750K will need to re-register in a year this means about 65K/regs/month generating ~1K ETH/month revenue (call this 1-2M depending on ETH price).

These numbers are just based on registrations holding at 2M and not continuing to grow.

Worst case here is if ETH price dumps as most of the ENS revenue is ETH denominated. What this means is that a significant diversification of ENS ETH into something like stables would be warranted as ENS will always earn ETH.

Here is what I have as rough general ENS financials with current taken over next 12 months (0 growth, ETH price >$1k).

24-36M/yr revenue (all in ETH)
12-15M/yr expenses (unclear probably mostly $$, and some ENS)
9-24M/yr net (mostly in ETH)

Call the ENS market cap something like $300M.
P/E is 33 (300/9) or (300/24) or 12.5

Now most growth companies price more like their revenue growth (ENS is more like 800-1000% - perhaps cut by 1/3-1/2 by expense growth) and so likely p/e here should be 40-50 based on growth and profitability (cost of revenue is perhaps 30-60% which is a bit high for a technology company but not out of line given the growth experienced).

Below some pretty conservative estimates on ENS cap/price. Leave working out effective P/Es to reader. :slight_smile:

ENS price target (0 growth, little to no ENS dilution to floating cap of 300M) between $20-30
ENS price target (2x growth, perhaps 10% ENS dilution to current cap) between 30-50
ENS price target (5x growth, 100% ENS dilution to current cap) between $40-80.

There are a couple takeaways from the above financial analysis that can give some perspective to best financial practices for ENS as an enterprise.

(1) Try to keep costs down. Make sure new initiatives will reward some very tangible and measuable bottom line. If this is a public good initiative don’t allow it to consume more than 1-2% of current MC ($3-6M) and don’t do more than 1 of these a year (bottom line can’t take much beyond another 5-10M hit and still be profitable unless growth continues)
(2) Start converting at least 1/2 the ETH earned to USDC or other stables (DAI, USDG, maybe even USDT in proportion to the outstanding caps).
(3) Start to get solid numbers on ENS domain renewals and avg time of registration of the entire ENS domain portfolio as well as ENS domain name churn (i.e. domains that don’t re-reg)
(4) Do everything possible to either start a ENS buy back, and/or limit ENS dilution as the outstanding ENS cap is the biggest lever on P/E and other financial metrics. It might make sense once enough USDC is raised to put up a large ETH:USDC v3 position spanning the ENS:USDC price between $10 and $200 as this is likely to capture significant fees for the community and it provides both a buyer and seller for liquidity over the price range above. One can also think about a v2 ENS/ETH and/or ENS/USDC as a backup liquidity source as well. As I have written about previously a 50:50 v2 TOKEN-STABLE LP basically has sqrt(token price volatility). This means if token price crashed by 75% your LP value only drops 50%. If it goes up 400% the LP goes up 100% etc. The additional beauty of the v2 Uni position is that fees go directly into available liquidity for trading (autocompounding) where as v3 they have to be collected and reposted to increase liquidity.

Consider the above before plowing liquidity into managers that are going to charge fees etc. By building community owned liquidity reserves, and managing properly community token dilution relative to price/earnings perspectives by markets the community can manage both the token market cap, relative earnings value relative to that cap (i.e. P/E) and build value both for the community, but also for funding general operations and community goals/goods with a sustainable long term view and approach.

Sincerely,
MakerMan

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This is a great analysis, but I think it’s important to remember that ENS DAO is not an actually an enterprise :slightly_smiling_face:

It is not a profit-making entity, and the $ENS token explicitly does not imply a stake in any returns from the “revenue” generated from the ENS registration fees, which per the constitution are primarily there to abate domain parking. In other words, there is no bottom line.

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You know when it gets to debates on semantics that we have descended pretty far.

From oxford.

noun

noun: enterprise ; plural noun: enterprises

  1. 1.a project or undertaking, typically one that is difficult or requires effort.

I contend that conceiving, building, operating ENS requires effort and is difficult. To this end to be sustainable requires that people be compensated for their effort somehow. Good management means taking this into account. Expenses need to be met somehow. ENS holders via governance effectively manage this - which for all intensive purposes makes ENS an enterprise. Now whether ENS seeks to be profitable or act as a non-profit, well in time most of these DAOs are going to face becoming some sort of formal organization that will have to define itself. IMO DAOs are not going to get a free pass in jurisdictions because they claim to be decentralized. If ENS tokens involve a say so in how the activities that define the ENS organization are carried out (including fund dispersal for work, buy backs, grants, donations, whatever) then while you and anyone else can claim ENS isn’t an enterprise I suspect many regulators in jurisdictions (at some point) are going to challenge this idea.

The fact that discussion has already started around ENS ‘treasury’ management means examining ENS from a revenue and expense perspective is a necessary endeavor.

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I’d like to see more members of ENS DAO involved in discussion like this. as we are all collectively making effort for all aspects of ENS but lacking community input on how we should manage the results looking forward. If there were as much effort from the community towards crucial topics like this compared to the energy spent into speculating what names to register before the normalization is official, ideas could really blossom.

I encourage thoughtful perspectives, ideology, alternative and relevant constructive criticisms. Also, DAO success theory and methods to achieve commonality between such.

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Right, and to be clear, it’s directly written into the ENS DAO constitution that funds are not used for profit, they are for ecosystem development and public goods. So the DAO already made that decision by overwhelming majority at its inception. This is important to uphold, lest the ENS protocol lose its all important credible neutrality!

I never brought up any legality issues.

All I was saying is that I think it’s important that any analysis take into account that the DAO is explicitly not optimizing for profit, by design. The current revenue stream (fees) are only in place to abate parking, otherwise they wouldn’t exist. So the way the financial perspective is thought of in this DAO should be very different from something like MakerDAO, in which token holder value is a priority as a profit making organization.

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In theory there is no problem in making profit, or setting any other goal which may seem similar to what traditional corporations do - like maximisation of market share, or shareholder value. It only becomes a problem when selected policy is leading to negative effects.

I really don’t want to write economics essay here, so to keep it brief very simple logic, like so →

Let’s say DAO decides to maximise profit! - no problem, it may have a ton of positive effects on the ecosystem, more capital for ecosystem development, but it may have very negative effects such as extracting undue value from ENS users, then this will be bad. I think its important to disentangle all those effects - decision whether to run for profit is what I would call a policy, but what should collective decision making mechanism be concerned with is effect of implemented policy.

You don’t have to call it “profit”, any policy may be called “cozy shiny day” but it’s design can lead to all sorts of effects impacting negatively ENS as protocol, DAO itself and community around them.

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There is one problem, in that the minute the organization governing the ENS protocol, which seeks to be the naming system for the internet, it destroys its claim to credible neutrality.

There would then be a direct profit incentive to compete with the protocol, and therefore re-create the fragmented identity space we have with web2. Whereas today, anyone can build on ENS and know that they will never have to worry about ENS doing something competitive or extractive against them if they become too successful. (think Apple App Store)

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I knew that word profit would immediately spark controversy :slight_smile:

You are missing the point, which is that you can call it whichever way you like it. “credible neutrality” is a good way to put it, but I think this matter is a bit more complex.

Can you imagine people occupying position of influence within ENS structure one way or the other and on the surface of it claiming to uphold values of public good, but in reality pursuing own agenda and acting in self interest? Do you think it might be possible?

It doesn’t matter what you call the policy, it’s about making sure that people inside the organisation acting with integrity. You can give it many names, like “credible neutrality”, “non-profit”, put various mechanisms in place to defend democracy, but if people are broken, then none of that is going to help you to run proper public good.

That’s what I was trying to say. In order to make sure that ENS is run like this →

It’s not enough just to say that you are “credibly neutral”.

EDIT: in fact I was looking at case Maker recently, I admit that I should’ve spent more time researching, but on the surface of it this is very clear case of fantastic neutral stable coin turning to rot. It is not that long ago I would safely say that DAI is pretty much public good, because anyone can rely on it being genuinely decentralised and free of undue influence. From the looks of it for them it was a gradual evolution, from this great public good towards broken profit driven system it is now, and judging from recent developments there is no coming back for DAI anymore. This path was not instantaneous, people behind the protocol were incrementally moving towards current state with every little step breaking the system.